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backwardation

noun back·ward·a·tion \ ˌbakwə(r)ˈdāshən \
Updated on: 26 Jul 2017

Definition of backwardation

plural -s
1 :the seller's postponement of delivery of stock or shares on the London Stock Exchange with the consent of the buyer upon payment of a premium to the latter
2 :the premium paid in backwardation — compare contango

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Origin and Etymology of backwardation

1backward + -ation

Financial Definition of BACKWARDATION

backwardation
noun

What It Is

Backwardation describes a downward sloping forward curve in a commodity market. This means that as the price of a commodity for future delivery is lower than the spot price -- the price of a commodity today.

How It Works

Backwardation starts when the cost of carry – i.e., storage, financing and convenience fees, exceeds the difference between the forward and spot price.

This situation usually arises when a commodity that normally experiences contango faces a positive demand or negative supply shock.  When this occurs, short term prices become greater than long term prices because consumers want the commodity immediately, despite the cost to hold the commodity.

Why It Matters

Backwardation is the opposite of contango. Both effects are important for rational pricing in futures markets, and sometimes present opportunities for investors to arbitrage price discrepancies.

Source: Investing Answers

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