Contango
Contango is a situation where futures prices for a commodity are higher than the spot price, creating an upward-sloping futures curve as maturity extends.
Concept map
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Definition
Contango is a situation where futures prices for a commodity are higher than the spot price, creating an upward-sloping futures curve as maturity extends.
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 Contango
Contango typically reflects storage costs, financing costs (cost of carry), and convenience yield. It causes negative roll yield for long futures holders — selling expiring contracts at lower prices and buying higher-priced distant contracts. Common in gold and increasingly in oil markets.
Rank-ready answer
Definition, example, and interview framing
Contango is a situation where futures prices for a commodity are higher than the spot price, creating an upward-sloping futures curve as maturity extends.
Spot crude oil: $80/barrel. 6-month futures: $85. The $5 contango reflects storage and financing costs. An ETF holding oil futures loses ~$5 every 6 months rolling contracts, even if spot oil stays flat — a major drag on commodity ETF returns.
In an interview, define Contango, explain where it appears in a real finance workflow, then name one assumption or limitation that a reviewer should check.
FAQ
Frequently Asked Questions
What is Contango?
Contango is a situation where futures prices for a commodity are higher than the spot price, creating an upward-sloping futures curve as maturity extends.
How is Contango used in finance?
Contango typically reflects storage costs, financing costs (cost of carry), and convenience yield. It causes negative roll yield for long futures holders — selling expiring contracts at lower prices and buying higher-priced distant contracts. Common in gold and increasingly in oil markets.
Can you give an example of Contango?
Spot crude oil: $80/barrel. 6-month futures: $85. The $5 contango reflects storage and financing costs. An ETF holding oil futures loses ~$5 every 6 months rolling contracts, even if spot oil stays flat — a major drag on commodity ETF returns.