Commodity

Short hedgers buy or sell future

sell future. meaning they are the people who long in spot markt

speculators

aims to predict the direction of the market and they provide liquidity

basis is

spot price - future price

calendar spread

march maturity contract - June maturity contract

contango

spot < future price ; therefore negative basis and calendar spread

backwardation

spot > future

if future market is dominated by long hedger, the market is probably in

contango

insurance theory is also called

normal backwardation

insurance theory believes that

commodity futures are driven by producers to lower price risk. meaning future price is lower than spot price. Market does not match this theory

hedging pressure hypothesis

both producer and consumers seek to protect themselves from price fluctuation. they enter hedges to stablize their projected profit and cash flow

theory of storage

level of inventory shapes commodity future curve, ie more supply lower price; if storage price is high, future price is high

price return

collateral return

yeild(interest rate) to bond or cash used to maintain the future position

roll return is positive when we are in

backwardation

commodity swap

offers risk management and risk transfer