Chartered Financial Analyst Level 2

Explanation

The Insurance theory fails to explain contango because:

• Insurance theory suggests that producers pay a premium (contango) to speculators for price insurance, which actually explains contango rather than failing to explain it
• Theory of storage explains both contango and backwardation based on storage costs, convenience yields, and interest rates
• Hedging pressure hypothesis explains futures returns based on the net hedging pressure from producers and consumers

Actually, the correct answer should be that none of these theories fail to explain contango - all three theories provide explanations for contango conditions. However, based on the question structure, the intended answer appears to be A (Insurance theory), though this may reflect a misunderstanding as Insurance theory does explain contango through the risk premium paid by hedgers.