We use cookies to improve security, personalize the user experience,
enhance our marketing activities (including cooperating with our marketing partners) and for other
business use.
Click "here" to read our Cookie Policy.
By clicking "Accept" you agree to the use of cookies. Read less
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.
Table of content
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.
Key legal elements
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)
Comparison with related terms
Term
Definition
Key Difference
Contango
Future prices are higher than current spot prices.
Indicates expected costs of storage and insurance.
Backwardation
Future prices are lower than current spot prices.
Indicates a market condition of supply shortage or high demand.
Common misunderstandings
What to do if this term applies to you
If you are involved in trading commodities or futures contracts, it's important to understand how contango may affect your investments. Consider using legal templates from US Legal Forms to draft contracts or agreements related to your trading activities. If your situation is complex or involves significant financial risk, consulting a legal professional is advisable to ensure you make informed decisions.
Find the legal form that fits your case
Browse our library of 85,000+ state-specific legal templates.