Which term describes the phenomenon of a futures contract being more expensive than the expected future spot price?

• A. Backwardation
• B. Contango
• C. Arbitrage
• D. Hedging

Answer: (B)

The phenomenon where a futures contract is more expensive than the expected future spot price is referred to as contango. In a contango market, the prices of futures contracts reflect additional costs such as storage and financing, leading to a situation where the future price exceeds the spot price anticipated at maturity. This pricing dynamic often occurs in markets for commodities that can incur significant holding or carrying costs, such as oil or agricultural products.

As the maturity date of the futures contract approaches, the futures price may decrease and align more closely with the expected spot price. The presence of contango suggests that market participants are willing to pay a premium for future delivery, anticipating higher prices due to supply constraints or other factors influencing future market conditions.