Two traders are arguing about the difference between an inverted futures market, Backwardation and Contango: Trader 1:
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Question:
Trader 1: “Contango and Normal Contango are different. Contango refers to a situation where futures prices rise with maturity due to a positive cost of carry whereas Normal contango refers to falling futures prices as a contract gets closer to maturity.”
Trader 2: “An inverted futures market and Backwardation are the same.
In both a backwardated and an inverted market, futures prices are lower than the current spot price.”
Which of the following best describes the two traders’ statements?
A) Trader 1 is correct
B) Trader 2 is correct
C) Both trader 1 and trader 2 are correct
D) Neither Trader 1 nor Trader 2 are correct
E) Both A and D are correct
Related Book For
Corporate Finance
ISBN: 9781265533199
13th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
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