Simple English definitions for legal terms
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Contango: Contango is a term used in the securities market to describe a situation where long-term futures or options contracts are more expensive than short-term contracts. This is also known as a normal market. The extra cost paid for these longer-term securities reflects the cost of holding the commodity for future delivery.
Definition: Contango refers to a market condition where long-term futures or options contracts are priced higher than short-term contracts. This is also known as a normal market. The higher price paid for longer-term securities reflects the cost of holding the commodity for future delivery.
For example, let's say that the current price of oil is $50 per barrel. A futures contract for oil that expires in one month may be priced at $52 per barrel, while a contract that expires in six months may be priced at $55 per barrel. This difference in price between the short-term and long-term contracts is the contango.
Another example is in the stock market. If a stock is expected to pay a dividend in the future, the price of the futures contract for that stock will be higher than the current price of the stock. This is because the futures contract takes into account the expected dividend payment, which is a cost of holding the stock for future delivery.
These examples illustrate how contango reflects the cost of holding a commodity or security for future delivery. The longer the time period until delivery, the higher the cost of holding, which is reflected in the higher price of the futures contract.