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

[S N V Krishna]

Hi Christofer, I saw this late, nevertheless here is my view.

Contango (Normal) market  and backwardation in futures / forwards depends upon current supply demand balance vs. expectations on forward supply demand balance.

Contango markets where in futures higher than spot is conspicuous in agricultural commodities (ex. soybean, corn etc.) during harvesting period where spot/current prices are depressed due to ample availability vs. forwards. Nature of market gradually shifts to backwardation as it approaches sowing period where in cash prices are at elevated levels due to low supplies and forwards at discount on expectation of increase in supplies during harvesting period. This is in general, however aberrations do occur following deviation in normal supply patterns like weather impact on production. 

ii) on crude oil - crude oil is mostly in backwardation in recent bull rally. The current firmness in prices is mostly in response to disturbances in middle east and hence their likely impact on immediate availability of supplies. This could change moving forward once output is restored to normal levels. 

Regards,

S.N.V. Krishna


-----Original Message-----
From: r-sig-finance-bounces at r-project.org [mailto:r-sig-finance-bounces at r-project.org] On Behalf Of Christofer Bogaso
Sent: Monday, June 30, 2014 4:08 AM
To: r-sig-finance at r-project.org
Subject: [R-SIG-Finance] A question on Forward Price

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.

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,

_______________________________________________
R-SIG-Finance at r-project.org mailing list https://stat.ethz.ch/mailman/listinfo/r-sig-finance
-- Subscriber-posting only. If you want to post, subscribe first.
-- Also note that this is not the r-help list where general R questions should go.