Explanation
Contango is a term used in commodity and futures markets to describe a situation where futures prices are higher than the spot price. This is the opposite of backwardation, where futures prices are lower than the spot price.
Key Points:
- Contango Definition: A market is in contango when the futures price for a commodity is higher than the expected future spot price, or more commonly, when futures prices are higher than the current spot price.
- Market Structure: Contango typically occurs when there are costs associated with storing the commodity (storage costs, insurance, financing costs) and when there is ample supply.
- Term Structure: In contango, the futures curve is upward sloping, meaning prices increase as the delivery date moves further into the future.
- Implications: Contango can create a positive cost of carry and may lead to negative roll yields for investors who need to roll over their futures positions.
Therefore, the correct answer is C: higher than the spot price.
