Chartered Financial Analyst Level 2
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12 When futures contracts are in contango:
Exam-Like
A
A their value tends to erode over time.
B
B they have a positive calendar spread.
C
C they must be settled by physical delivery.
Explanation:
Explanation
When futures contracts are in contango:
- They have a positive calendar spread - This is correct because contango means longer-term futures prices are higher than near-term futures prices, creating a positive calendar spread
- Their value tends to erode over time - While this can happen as futures prices converge to spot prices, it's not the definition of contango
- They must be settled by physical delivery - Settlement method is unrelated to whether markets are in contango or backwardation
Contango specifically refers to a market condition where futures prices are higher than spot prices, and longer-term contracts trade at higher prices than near-term contracts.
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