What is contango?

Contango is a market condition that occurs when futures prices are higher than the expected future spot prices of an underlying asset. This typically indicates that the market expects the price of the asset to rise over time, often due to factors such as storage costs, interest rates, and seasonal demand variations. In contango, the futures market reflects higher prices due to these anticipations of future supply and demand dynamics.

Understanding contango is critical for investors and traders who engage in futures contracts, as it can influence their strategies related to hedging or speculating on price movements. The occurrence of contango often signifies a healthy market with a forward-looking pricing mechanism where holding the asset incurs costs. Thus, the correct choice captures the essence of what contango is and illustrates the implications of futures pricing relative to expected spot prices.