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But even so there is utility for the forward buyer in the deal.Experience tells major end users of commodities (such as gasoline refineries, or cereal companies that use great quantities of grain) that spot prices are unpredictable.It is often called 'normal backwardation' as the futures buyer is rewarded for risk he takes off the producer.If the spot price is lower than the futures price, the market is in contango." The futures or forward curve would typically be upward sloping (i.e.The opposite market condition to contango is known as backwardation."A market is 'in backwardation' when the futures price is below the spot price for a particular commodity.This is favorable for investors who have long positions since they want the futures price to rise to the level of the current spot price." The Commission of the European Communities, in a report on agricultural commodity speculation, defined backwardation and contango in relation to spot prices: "The futures price may be either higher or lower than the spot price.When the spot price is higher than the futures price, the market is said to be in backwardation.
There are strategies to mitigate this problem, including allowing the ETF to create a stock of precious metals for the purpose of allowing investors to speculate on fluctuations in its value.
"normal"), since contracts for further dates would typically trade at even higher prices.
(The curves in question plot market prices for various contracts at different maturities — cf.
Sellers like to "sell forward" because it locks in an income stream.
Farmers are the classic example: by selling their crop forward when it is still in the ground they can lock in a price, and therefore an income, which helps them qualify, in the present, for credit.
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An oil refiner might purchase 50% spot and 50% forward, getting an average price of $87.50 averaged for one barrel spot ($75) and the one barrel bought forward ($100).