That is 'Kontango' | Information 2019 - What is it?
Kontango - a situation, where future pricegoods above the expected cash price. Kontango treats a situation where future cash price is lower than the current price, and people are ready to pay more for goods at some moment in the future, than the actual expected goods price. It can occur because of desire of people to pay an award to have goods in the future instead of paying expenses of storage and to incur expenses for purchase of goods today.
2019 - Kontango
Kontango, Information - 2019
DESTRUCTION 'contango' | Information 2019 - What is it?
When the market "in contango", it describes a situation in which the cost of delivery of the special future contract has to meet down to meet the future price. The market which is in contango, specifies that the curve of the forward or futures tends up. If the prices didn't meet, it would adjust opportunity for investors to get profit on arbitration. Situations with contango can be expensive to the investors taking pure long positions as the prices of futures fall.
For example, assume that the investor goes long with the future contract to 100. In one year the contract has to. If the expected future cash price makes 70, the market is in contango, and the price of the future will have to fall (if future cash price doesn't change) to meet with the expected future cash price.
Distinction between a discount and contango
The contrast contango is known as a normal discount. The discount is considered often as the normal state of the market of consumer goods. The market "in a discount" when the price of the future is lower than the expected future cash price for special goods. Therefore, the discount specifies that the curve of the forward or futures tends down. It is favorable for investors who have long provisions as they want that the price of the future raised.
For example, assume that the price of crude Western Texas Intermediate (WTI) oil trades in 40, and the price of the future of the contract, due in one year, makes 50. Therefore, the goods as speak, are in a discount when the price of the future has to raise (if the expected future cash price doesn't change) to meet with the expected future cash price.
Investors who are long consumer goods which test contango, are inclined to lose money when future contracts expire. Therefore, investors who want to remain long in these consumer goods, would have to buy contracts at higher prices which will cause a negative crop of a roll. For example, assume that the investor is long one future contract which expires in six months on contango overcomings of goods at the price of 19 when the goods trade in 12 now. Assume that six months passed, and the future contract fell to 17, and the cash price increased to 14. The investor wants to remain long, rolling his future contracts and buys one future contract for 25, expiring in three months. The investor would suffer losses from rotation of the future contract by next month at higher price.
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