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Answer: As an inverted futures market since more distant delivery contracts are trading at lower prices than nearer-term ones.
## Explanation This is an **inverted futures market** (also known as backwardation) because: - **Spot price**: 321 - **Near-term futures**: July 2014 = 312 - **Mid-term futures**: October 2014 = 310 - **Longer-term futures**: December 2014 = 309 **Key observations:** - Futures prices are **below** the spot price (312 < 321) - More distant delivery contracts are trading at **lower prices** than nearer-term ones (309 < 310 < 312) - This creates a **downward-sloping** futures curve **Why this is inverted/backwardation:** - In a normal futures market, futures prices are typically **above** spot prices due to carrying costs (storage, insurance, financing) - In an inverted market, futures prices are **below** spot prices, often indicating: - Current supply shortages - High immediate demand - Expectations that prices will decline in the future - Convenience yield outweighing carrying costs Option B correctly identifies this as an inverted futures market, while options A and C incorrectly describe it as a normal futures market.
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A commodities trader observes quotes for futures contracts as follow:
| Spot Price | 321 |
|---|---|
| July, 2014 | 312 |
| October, 2014 | 310 |
| December, 2014 | 309 |
This commodity is trading:
A
As a normal futures market since the futures prices are consistent with the commodity's seasonality.
B
As an inverted futures market since more distant delivery contracts are trading at lower prices than nearer-term ones.
C
As a normal futures market because it is typical for more distant delivery contracts to trade lower than nearer-term delivery contracts.