You are a commodity futures trader. The future price for a contract that expires in a year is at $100. However, the expected future spot price is sitting below that price.
The market is in what is known as “contango.”
This is a situation where buyers gladly pay more money for a commodity in the future than they would for the spot price. They would pay the premium because they're probably not thrilled about paying for storage or other costs if they purchased that oil today.
The futures curve is therefore upward sloping, as prices between the spot and futures price would need to converge. Should that not occur, investors will be presented with a unique opportunity to arbitrage trade the commodity and pocket the difference between the contracts.
Related or Semi-related Video
Finance: What is the Arms Short Term Tra...13 Views
finance a la shmoop what is the Arms Short Term Trading Index not to be
confused with the short arms term trading index a run by this guy all [Man with dinosaur for a head sitting at a desk]
right Richard Arms invented it in the 70s and then a journalist cleverly
renamed it Trin.... short for trading index very clever
yeah well Trin as in Rin Tin is just an index for the advanced decline ratio in
the stock market and if you haven't seen our video on it oh well you should we've
had George Clooney of fortune so directed the computation of the Trin [George Clooney directing a show]
looks like this Trin equals advanced issues divided by declining issues all
over advanced volume divided by declining volume....
So note that this equation maps volume as an element of the computation so it's
meaningfully more useful than just the vanilla advanced decline ratio and hey [Man discussing equation]
just keeping it real their advanced decline ratio we love you but you're [Advanced decline ratio laying on sofa eating doughnuts]
just not as good all right well so if we compute things we get a value of 1 and
well that's good or rather a bullish sign that the market "wants to go
up" above one is bearish and at premiums of 30 40 50 percent ie [Bear walking by a river]
calculations of 0.5 very bullish to 1.5 very bearish well those are signs that
have been validated by actual market performance over time well why would we
care about this calculation in the first place, well if we get the answer right as [Man staring at a crystal ball]
to where the markets going well you know we can make a fortune
yeah ask Warren Buffett... [Warren eating dinner]
Up Next
What is After Hours Trading/Extended Trading? After hours trading describes any trades made after the market closes or before the market opens. Bec...