Contango
A forward curve whose later deliveries trade above nearby prices.
Name the object before manipulating it.
Carry costs or abundant inventory can make deferred delivery more expensive.
A forward curve whose later deliveries trade above 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.
Roll yield, storage signals and calendar-spread positioning.
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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