Contango

A futures curve sloping upward, with dated prices above the spot price - the ordinary state of a good that is plentiful and expensive to store.

Example

A three-month price of 2,028.00 against a spot of 2,000 costs 1.3807% each roll, which compounds to -5.4094% over four quarterly rolls with the spot price unchanged.

Important

It is a cost of carry, not a prediction. Reading an upward-sloping curve as a signal that prices are expected to rise is the most expensive misunderstanding available in this class.

Related terms

• Backwardation — A futures curve sloping downward, with dated prices below the spot price - what happens when a good is scarce now and buyers will pay a premium to have it immediately.
• Roll yield — The gain or loss a futures holder takes each time an expiring contract is replaced with a later one, as the expiring contract converges to the spot price.
• Cost of carry — What it costs to hold a physical good until a future date: financing on the capital tied up, plus storage and insurance.
• Futures contract — An exchange-traded agreement to take or make delivery of a stated quantity of a good on a stated future date, held on a deposit far smaller than the notional amount.

Lessons that explain it

• The curve, and why a fund can lag the price it tracks — Spot is set by physical supply and demand. Everything dated is set by the cost of carrying the good to that date - and when the curve slopes upward, a fund that holds contracts loses money every time it rolls, even with the price standing perfectly still. (12 min)
• Appraising one exposure: the drivers, the carry and what the product holds — Six checks. Two of them - the curve and what the product actually holds - decide more of a five-year outcome than any view about supply and demand, and both have exact published answers. (13 min)

All 578 terms in the Investing glossary