[R-SIG-Finance] A question on Forward Price

Christofer Bogaso bogaso.christofer at gmail.com
Mon Jun 30 00:32:35 CEST 2014


I defined backwardination as forward curve is downward sloping as
compared to spot. So you may term it as you said 'forward prices
increasing/decreasing'. I felt this is bit different than what you
said as 'difference between expected and futures'.

On Mon, Jun 30, 2014 at 4:14 AM, Dominykas Grigonis
<dominykasgrigonis at gmail.com> wrote:
> Can you please define what backwardation is?
>
> An answer to your question would be yes if instead of using fancy terms as
> backwardation, you would substitute it with “forward prices increasing”.
>
> Why? Supply and demand.
>
> Kind regards,
> Dominykas Grigonis
>
> On Jun 29, 2014, at 11:16 PM, Christofer Bogaso
> <bogaso.christofer at gmail.com> wrote:
>
> Could you please elaborate why you are saying F = s+C is wrong? What
> is right then? I assumed CoC consists of cost of financing, storage
> cost, CY and other related costs
>
> My original question was very straightforward. If I see for a
> underlying which is storable and consumable, and forward curve for
> that is moving more and more in backwardination then is it not
> straightforward to think that market is expecting future spot price
> would be higher due to future supply disruption?
>
> I was looking for some yes/no answer and why...
>
> Thanks and regards,
>
> On Mon, Jun 30, 2014 at 3:07 AM, Michael Weylandt
> <michael.weylandt at gmail.com> wrote:
>
> If p => q, and we can observe ~q, we should doubt p.
>
> More directly, electricity is a case where your assumptions (F=S+C) about
> forwards pricing are transparently wrong.
>
> You need to think more about how forwards are really priced and then your
> questions about crude futures will sort themselves out.
>
> On Jun 29, 2014, at 5:09 PM, Christofer Bogaso <bogaso.christofer at gmail.com>
> wrote:
>
> Ofcourse Electricity can not be stored or storage cost would be
> extraordinarily high. Therefore it would have zero CY. I feel Power
> prices should always be in contango
>
> On Mon, Jun 30, 2014 at 2:45 AM, Michael Weylandt
> <michael.weylandt at gmail.com> wrote:
>
>
>
> On Jun 29, 2014, at 4:07 PM, Christofer Bogaso <bogaso.christofer at gmail.com>
> wrote:
>
> Hi again,
>
> I would like ask a small question however not really related to R.
>
> We all know that non-arbitrage Forward price of any underlying (except
> perhaps Interest Rate) is just the spot price plus the cost of carry.
> Cost of carry again depends on cost of borrowing and convenience
> yield.
>
>
> Do we know that?
>
> Consider energy (electricity) futures....
>
>
> Therefore my question is, is it true that for most consumable
> commodity like agricultural commodity, crude oil, the Forward market
> will mostly remain in backwardination? Specially for Crude oil it
> looks always remains in Backwardination. Because since they are
> consumable then buying now and storing would be more economical than
> buying it Forward for future use, hence CY would be higher.
>
> Another related question is, for Crude oil if Forward market becomes
> more in Backwardination then does it imply that, in Future it's price
> is expected to increase, keeping everything else same?
>
> I really appreciate your thought on the same.
>
> Thanks and regards,
>
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