Backwardation
Backwardation occurs when futures prices are below the spot price, creating a downward-sloping curve — often due to high immediate demand or convenience yield.
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Definition
Backwardation occurs when futures prices are below the spot price, creating a downward-sloping curve — often due to high immediate demand or convenience yield.
Use case
Used in derivatives workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Backwardation
Backwardation benefits long futures holders through positive roll yield — selling higher-priced near contracts and buying lower-priced distant ones. It often signals tight supply (commodities) or high dividends (equity index futures pre-dividend). Normal backwardation was predicted by Keynes' theory of storage.
Example: Spot wheat: $8/bushel due to drought concerns. 3-month futures: $7.50 as supply expected to normalize. Farmers sell at $8 spot; speculators earn $0.50 roll yield over 3 months holding futures even if spot stays flat.