Front Month Pricing

syswizard

syswizard

As we all know, the basis or premium of a futures contract is composed of storage, financing, and supply/demand projections.
I just want to ask this one related to front-month pricing:
As the front month gets closer to expiration, the front month price gets closer to the spot price for the given commodity.
Is that correct ? Is there any reason why it wouldn't get closer ?
 
syswizard said:
As we all know, the basis or premium of a futures contract is composed of storage, financing, and supply/demand projections.
I just want to ask this one related to front-month pricing:
As the front month gets closer to expiration, the front month price gets closer to the spot price for the given commodity.
Is that correct ? Is there any reason why it wouldn't get closer ?
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The spread between the Front month and Spot will diminish to the point of being almost identical at expiration.

(Otherwise, everyone will exercise to take delivery to pocket the spread.)
 
syswizard said:
Thanks Schizo. This concept was contradicted in the ES Journal today.
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schizo said:
The spread between the Front month and Spot will diminish to the point of being almost identical at expiration.

(Otherwise, everyone will exercise to take delivery to pocket the spread.)
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For a very good reason my friend. To exploit this you will need storage to take delivery. Which the world has run out of, my friend.
 
DarthSidious said:
For a very good reason my friend. To exploit this you will need storage to take delivery. Which the world has run out of, my friend.
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I agree, and I've stated earlier in the ES thread that contango is borne out of desperation.
 
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