Key Terms
Contango: When futures price of asset, commodity, or currency exceeds the current price, or the current price is cheaper.
Backwardation: The futures price of an asset is cheaper than its current price, or the current price is higher.
Risk-free Profit Scenarios: The futures price of an asset, commodity, or currency exceeds the sum of the current price and standard interest on a loan of said price. Therefore, one can requisition a loan of the current price, enter into the futures contract, and execute it by expiration with the difference between the futures price and the sum of the current price plus standard interest on the initial loan being profit. The futures price of an asset, commodity, or currency is equivalent to that of the current price, and standard interest exceeds interest on borrowing the underlying. Thus, one might borrow and sell the underlying with subsequent liquidity available to acquire issues whose interest exceeds that of the borrowing cost. This excess interest or nominal delineation is known as the premium.
Quantitative Dynamics of Futures Downloadable Reference: https://drive.google.com/file/d/1q4xRt-EOqeSUXe-fcldbl-fCF-5APE0I/view
For additional info, please check the materials page titled Black 76 Futures & Options Pricing Model.
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