Backwardation Law and Legal Definition

Backwardation means a downward sloping forward Curve. A backwardation starts when the difference between the forward price and the spot price is less than the cost of carry, or when there can be no delivery arbitrage because the asset is not currently available for purchase. Backwardation says that as the contract approaches expiration, the futures contract will trade at a higher price compared to when the contract was further away from expiration. This is said to occur due to the convenience yield being higher than the prevailing risk free rate. The opposite market condition to backwardation is known as Contango, in which the expected spot price at maturity is lower than the forward price.