Backwardation
A forward curve whose later deliveries trade below nearby prices.
Name the object before manipulating it.
Scarcity and immediate utility can make prompt barrels or inventory unusually valuable.
A forward curve whose later deliveries trade below nearby prices.
State the governing relationship.
Notation and units
Decimal rates and volatilities, year-fraction time and continuous compounding unless stated otherwise.
Draw the boundary of the claim.
Definitions, units and information sets are fixed before the mathematical relationship is applied.
Rates and volatilities use decimal units and time uses year fractions unless stated otherwise.
The relationship is local to its stated assumptions and should not be extrapolated mechanically.
“An unstated convention is a future reconciliation break.”— THEQUANTBATEMAN
Connect the definition to an observable.
Inventory stress, positive roll and prompt-spread risk.
Translate the concept into a risk question.
State the convention, identify the observable and ask which COMM risk remains after the proposed hedge.
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