Updated for the 2026-2027 CFA® Level II curriculum.
Contango and backwardation describe whether a futures price sits above or below the spot price today. The distinction matters because it drives convergence as a contract approaches expiration, and convergence is the mechanism behind roll return. At Level II, candidates must read contango vs backwardation from a curve directly and contrast how rolling a long futures position behaves under each shape.
Quick Answer
In a simple contango structure, futures prices exceed current spot and rise with maturity. In a simple backwardated structure, futures prices are below current spot and fall with maturity. Real curves can contain both upward- and downward-sloping segments, so identify the maturities being compared. Curve shape reflects current pricing, not a forecast of future spot prices. For a long futures position that rolls contracts before expiration, contango usually drags returns down and backwardation usually lifts them, assuming the curve and spot price stay unchanged.
Key Takeaways
Contango means the futures price exceeds the spot price; backwardation means the futures price is below the spot price.
Curve shape describes today's pricing relationship between contracts, not a prediction of where spot will move.
As a contract nears expiration, its price converges toward the spot price.
Rolling a long position from an expiring contract into a later contract usually produces a negative roll return in contango and a positive roll return in backwardation, holding the curve and spot price constant.
Backwardation is an observed curve shape today. Normal backwardation is a separate theory about futures prices sitting below the expected future spot price.
What You Need to Know for CFA Level II
Level II asks you to analyze the spot-futures relationship in contango and backwardation markets, not to memorize a single formula.
You must contrast roll return outcomes for long positions across both curve shapes.
You need to separate a curve observation, which compares current futures to current spot, from a forecast, which compares futures to an expected future spot price.
You should identify long versus short exposure and state a return convention before judging the sign of a roll return.
You need to treat convergence as the mechanism linking curve shape to roll return, not a detail to skip.
Read the spot-futures relationship and term structure
A futures curve plots price against maturity for the same underlying commodity. Comparing any two maturities tells you the curve's shape at that moment.
Contango
The futures price is above the spot price, and prices rise with maturity. Example: spot is 80, the three-month contract is 82, and the six-month contract is 84.
Backwardation
The futures price is below the spot price, and prices fall with maturity. Example: spot is 84, the three-month contract is 82, and the six-month contract is 80.
Feature | Contango | Backwardation |
|---|---|---|
Futures price vs spot | Futures above spot | Futures below spot |
Curve slope | Upward | Downward |
Which contract is dearer | Longer-dated contract | Nearer-dated contract |
What the shape tells you | Current pricing only | Current pricing only |
This table answers a curve-reading question, not a forecasting question. A curve in contango tells you the six-month contract costs more than spot today. It does not tell you where spot will be in six months. Candidates who treat curve shape as a spot price forecast make the exact error the LOS is designed to prevent.
Convergence
As a futures contract approaches expiration, arbitrage forces its price toward the spot price. By expiration, the futures price and spot price are effectively equal, assuming normal delivery and storage conditions hold. Convergence is the bridge between curve shape and roll return, covered next.
Backwardation vs normal backwardation
Backwardation compares the current futures price to the current spot price. Normal backwardation, a theory from Keynes, compares the current futures price to the expected future spot price. It argues that hedgers are net short, so long speculators demand compensation, pushing the futures price below the expected future spot price. These are different reference points. A market can show contango today, measured against current spot, while still being consistent with normal backwardation theory, measured against expected future spot. Do not use the two terms interchangeably.
Connect rolling to long-position return
An investor who wants continuous futures exposure cannot hold one contract forever. Before a contract expires, the investor sells the expiring contract and buys a later-dated contract. This is a roll.
Identify the position and return convention before assigning the roll effect a sign. Futures do not require paying the quoted contract price upfront. An adverse roll contribution arises as an above-spot contract converges downward under the stated assumptions. The same price movement benefits a short position.
Roll return in contango (long position)
The later contract is priced above the expiring contract. The investor buys at the higher price to maintain exposure. If the curve and spot price stay unchanged, that later contract must still converge down to spot by its own expiration. Its price falls over the holding period. For a long position, this is usually a negative roll contribution.
Roll return in backwardation (long position)
The later contract is priced below the expiring contract. The investor buys at the lower price. If the curve and spot price stay unchanged, that contract converges up to spot over time, and its price rises. For a long position, this is usually a positive roll contribution.
Position | Contango | Backwardation |
|---|---|---|
Long | Usually negative roll return | Usually positive roll return |
Short | Usually positive roll return | Usually negative roll return |
One distinction matters here. The price gap observed at the moment of the roll is not an instant realized loss or gain. It is realized gradually, through convergence, over the remaining life of the new contract, and only under the stated assumption that the curve and spot price do not change. If the curve shifts or spot moves, the actual outcome can differ from this baseline pattern.
Working Example
Case A: Contango
Step I. Setup
Spot price is 80. The front-month futures contract, close to expiration, has converged to 80. The next-month futures contract is priced at 84. An investor holds a long position in the front-month contract and wants to maintain exposure.
Step II. Roll transaction.
At expiration, the investor sells the front-month contract at 80 and buys the next-month contract at 84 to keep the position open.
Step III. Outcome
Assuming the curve and spot price stay unchanged, the next-month contract must converge to spot, which is still 80, by its own expiration. Its price falls from 84 to 80, a decline of 4 over the holding period.
Interpretation. The new contract starts 4 above spot and later falls by 4 as it converges. This is a futures trading loss per unit, rather than an upfront premium paid to enter the contract. This is the usual negative roll contribution in contango. No loss was realized at the roll date itself; it built up over the life of the new contract.
Case B: Backwardation
Step I. Setup
Spot price is 84. The front-month contract has converged to 84. The next-month contract is priced at 80. The investor holds the same long exposure and intends to roll.
Step II. Roll transaction
The investor sells the front-month contract at 84 and buys the next-month contract at 80.
Step III. Outcome
Assuming the curve and spot price stay unchanged, the next-month contract converges up to spot of 84 by its own expiration. Its price rises from 80 to 84, a gain of 4.
Interpretation. The long investor bought at a discount to spot and captured that discount as the contract converged upward. This is the usual positive roll contribution in backwardation, again realized gradually rather than instantly at the roll date.
Common Exam Traps
Confusing backwardation with normal backwardation
Backwardation compares current futures to current spot. Normal backwardation compares current futures to expected future spot and reflects a risk-premium theory. A curve can be in contango today and still be consistent with normal backwardation theory, because the two statements use different reference prices.
Treating contango as a guaranteed negative total return
Roll return is one component of total futures return, alongside price return and collateral return. A rising spot price or a shift in the curve can offset a negative roll contribution. Contango does not guarantee a negative total return.
Ignoring long versus short exposure
The sign of roll return flips with position direction. A short position in a contango market usually earns a positive roll contribution, the mirror image of the long position result.
Calling the roll price gap an immediate realized loss
The price difference between the expiring and new contract at the roll date is not booked as an instant loss or gain. It is realized through convergence over the life of the new contract, under the assumption that the curve and spot price remain unchanged.
Practice Question
An investor maintains continuous long exposure to a commodity futures contract by rolling into the next maturity before each expiration. The futures curve for this commodity is upward sloping and stable, and the spot price is unchanged over the analysis period. Holding the curve and spot price constant, the roll contribution to the investor's return from this strategy is most likely:
positive, because each new contract is purchased at a higher price than the expiring contract.
negative, because each new contract converges toward a lower spot price as it approaches its own expiration.
zero, because rolling a futures position does not change the investor's economic exposure.
Correct Answer: B
An upward-sloping, stable curve describes contango. Each new contract the investor buys is priced above spot. Under the stated assumption that the curve and spot price do not change, that new contract converges down to the unchanged spot price by its own expiration, so its price falls over the holding period. For a long position, this produces the usual negative roll contribution associated with contango.
Why Other Options Are Wrong
Option A misreads the price gap at the roll date as an immediate gain for the long investor. The new futures quote is above spot. Under the stated assumptions, subsequent downward convergence produces a loss for the long position; the quote difference itself is not an upfront cash payment.
Option C correctly notes that notional exposure is maintained through the roll, but it overlooks that the price paid for that exposure differs across contracts. The new contract's convergence path from its purchase price to spot creates a real return effect, so rolling is not return-neutral under contango.
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FAQs About Contango, Backwardation, Spot-Futures Relationships, and Roll Return
Does contango guarantee a loss?
No. Contango typically produces a negative roll contribution for a long position under an unchanged curve and spot price. Total return also includes price return and collateral return, and the curve itself can shift, so total return is not guaranteed to be negative.
How does backwardation differ from normal backwardation?
Backwardation compares the current futures price to the current spot price and describes today's curve shape. Normal backwardation compares the current futures price to the expected future spot price and reflects a theory about risk compensation for long speculators. The two terms use different reference prices and are not interchangeable.
Does rolling require paying the full quoted futures price?
No. Entering a futures position generally requires margin, with gains and losses settled through marking to market. The contract price sets the reference for those gains and losses. State the collateral and notional convention before turning a price change into a percentage return.