Contango

This occurs when the forward curve is upward sloping (see forward curve). That is, the price of a future or forward contract of an asset is greater than its spot price (today’s market price). A normal forward curve is in contango, due to the time value of money. Buying an asset today implies a cash outlay equivalent to the price of the asset.

Buying a forward or futures contract, however, does not require any cash outlay until maturity (excluding the margin account). Therefore the benefit of buying a future or a forward is that the investor can invest this cash and earn a return on it. Forward prices are higher than spot prices to reflect this benefit.

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