Contango Explained: The Legal Definition and Market Implications
Definition & meaning
Contango is a market condition in the futures market where the price of a commodity for future delivery is higher than its current spot price. This situation often arises due to the costs associated with storing and insuring the commodity. In essence, contango reflects the normal upward slope of prices for contracts that expire further in the future compared to those that expire sooner. This condition is common in equity markets and is the opposite of backwardation, where future prices are lower than current prices.
Legal use & context
Contango is primarily relevant in the context of commodities trading and financial markets. Legal professionals may encounter this term when dealing with contracts for the sale of commodities, futures contracts, or investment agreements. Understanding contango can be crucial for legal practitioners advising clients on trading strategies or investment risks. Users can manage certain aspects of futures trading through legal templates available from US Legal Forms, which provide guidance on drafting and understanding relevant agreements.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A trader purchases a futures contract for oil that expires in six months at a price of $70 per barrel while the current spot price is $65 per barrel. This scenario illustrates contango, as the future price is higher than the spot price.
Example 2: A farmer agrees to sell wheat for delivery in one year at a price of $5 per bushel, while the current market price is $4.50 per bushel. This is another instance of contango, reflecting the expected costs and risks associated with future delivery. (hypothetical example)