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Answer: c) An inverted market (aka, backwardation) might be explained by negative interest rates but does not necessarily imply negative rates
The true statement is **(c)**. A few reminders: - **Basis** is commonly defined as **spot price minus futures price**. - In **contango** (normal market), futures prices are above spot prices, so the basis is typically **negative**. - In **backwardation** (inverted market), futures prices are below spot prices, so the basis is typically **positive**. Therefore: - **(a)** is false. - **(b)** is false. - **(d)** is false because in contango, as maturity approaches, futures prices typically **decline toward spot** under convergence, not increase. Statement **(c)** is true because an inverted curve can be consistent with negative interest rates, but an inverted market does **not require** negative rates; it can also result from other factors such as convenience yield or storage constraints.
Author: Manit Arora
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Q-709.3. Which statement is TRUE about the shape of the commodities forward curve?
A
a) In a normal market (aka, contango), the basis is positive
B
b) In an inverted market (aka, backwardation), the basis is negative
C
c) An inverted market (aka, backwardation) might be explained by negative interest rates but does not necessarily imply negative rates
D
d) In a contango (aka, normal) market with a static forward curve, the price of a futures contract will INCREASE as time to maturity approaches zero
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