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Answer: In a backwardation market, the discount in forward prices relative to the spot price represents a positive yield for the commodity consumer.
## Explanation **Backwardation vs. Contango:** - **Backwardation**: Forward prices are lower than spot prices (F < S) - **Contango**: Forward prices are higher than spot prices (F > S) **Analysis of Option B:** - In backwardation, forward prices are at a discount to spot prices - For commodity consumers (buyers), this discount represents a positive yield because they can lock in lower future prices compared to current spot prices - This benefits consumers who need to purchase the commodity in the future **Why other options are incorrect:** - **Option A**: In backwardation, suppliers receive lower forward prices, which represents a negative yield for them - **Option C**: In contango, forward prices are at a premium, not a discount - **Option D**: In contango, consumers pay higher forward prices, which represents a negative yield for them The correct understanding is that backwardation benefits consumers through lower forward prices, while contango benefits suppliers through higher forward prices.
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In commodity markets, the complex relationships between spot and forward prices are embodied in the commodity price curve. Which of the following statements is true?
A
In a backwardation market, the discount in forward prices relative to the spot price represents a positive yield for the commodity supplier.
B
In a backwardation market, the discount in forward prices relative to the spot price represents a positive yield for the commodity consumer.
C
In a contango market, the discount in forward prices relative to the spot price represents a positive yield for the commodity supplier.
D
In a contango market, the discount in forward prices relative to the spot price represents a positive yield for the commodity consumer.