I got this question in Q-Bank. I understand the first sentence in the answer. But the rest of it just makes no sense to me at all. If anyone can explain, I would really appreciate it… What is the situation called when a futures price continuously increases over its life because most hedging strategies are short hedges? A) Contango. B) A normal market. C) Normal backwardation. Your answer: A was incorrect. The correct answer was C) Normal backwardation. Normal backwardation means that expected futures spot prices are greater than futures prices. It suggests that when hedgers are net short futures contracts, they must sell them at a discount to the expected future spot prices to get investors to buy them. The futures price rises as the contract matures to converge with spot prices.
As I see it, it’s just a definition - when future price is less than expected (compensation for risk of owning an asset) - it’s called normal backwardation. Long to maturity future price has to be lower - otherwise who would buy it (of course when there are no benefits in owning it). Closer to maturity - price is increasing (converging to expected), since risk is becoming smaller. Something like this. Off topic - ya - ne - knut means - I am not a whip - in Russian. Are you Russian?
Yurik74 Wrote: ------------------------------------------------------- > As I see it, it’s just a definition - when future > price is less than expected (compensation for risk > of owning an asset) - it’s called normal > backwardation. Long to maturity future price has > to be lower - otherwise who would buy it (of > course when there are no benefits in owning it). > Closer to maturity - price is increasing > (converging to expected), since risk is becoming > smaller. Something like this. > > Off topic - ya - ne - knut means - I am not a whip > - in Russian. Are you Russian? No he likes Yanni. I tried YanniNut too when I joined up, but some jerk is just squatting on that priceless s/n
haha 
yes, i’m russian, but i never thought about my screen name in this way http://www.youtube.com/watch?v=zZLKb_5S21E remember this guy? i was part of the crew obsessed with cute Knut thats where the screen name come from and thank you for the answer! I think I am having the most trouble with kind of a cause-and effect here: for example, when it says “when hedgers are net short futures contracts”, I guess it means that there are people who want to sell futures contracts, and it seems like no one really wants to buy them (hold the risk of ending up with the asset), they have to sell them at a discount to the expected spot price…something like this?
Who is Yanni?