Backwardation is a term used in financial markets to describe a situation where the price of a futures contract is lower than the expected spot price at the time of delivery. It is a phenomenon that occurs when the demand for a commodity is higher than its supply, leading to an increase in the price of the commodity in the short term. In this article, we will explore the definition, origin, and meaning of backwardation in financial markets.
Definitions
Backwardation is a situation where the price of a futures contract is lower than the expected spot price at the time of delivery. This situation occurs when the demand for a commodity is higher than its supply, leading to an increase in the price of the commodity in the short term.
Origin
The term backwardation has its roots in the commodity markets of the 19th century. It was used to describe a situation where the price of a commodity was lower in the future than it was at the present time. This situation was caused by a shortage of the commodity in the market, leading to an increase in its price in the short term.
Meaning in different dictionaries
According to the Oxford English Dictionary, backwardation is “the situation in which the price of a commodity for future delivery is lower than the price for immediate delivery”. The Merriam-Webster dictionary defines it as “a situation in which the price of a commodity for future delivery is lower than the spot price”.
Associations
Backwardation is often associated with a shortage of a commodity in the market. It can also be caused by a sudden increase in demand for a commodity, leading to a temporary increase in its price.
Synonyms
The synonyms of backwardation include contango, carry, and normal backwardation.
Antonyms
The antonyms of backwardation include contango, backwardation premium, and forwardation.
The same root words
The same root words as backwardation include backward, back, and ward.
Example Sentences
- The market is currently experiencing backwardation due to a shortage of crude oil.
- The price of gold is in backwardation, indicating a short-term increase in demand.
- The backwardation in the market has led to a rise in prices for agricultural commodities.
- The futures market is currently in a state of backwardation, indicating a temporary increase in demand for the commodity.