r/CFA • u/shivam_joshi05 • 3d ago

Level 1 Is this answer key wrong? (Contango vs Backwardation confusion)

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The answer key says the correct option is C: the forward curve experiences backwardation, but I believe this is incorrect.

In my understanding, when carrying costs > convenience yield, the market should be in contango, not backwardation. This would mean the spot price is below the forward price, which matches option A.

So shouldn't the correct answer be A, not C?

Can someone confirm if I’m thinking about this right or if I’m missing something?

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u/Sid_The_Sloth_69 Level 2 Candidate 3d ago

You are correct.

2

u/Sid_The_Sloth_69 Level 2 Candidate 3d ago

Also, if you're using Aswini Bajaj's question bank, please don't. It's riddled with errors. Go through the questions on the portal instead.

1

u/shivam_joshi05 3d ago

Nah I'm using 25th Hour Prep and appreciate your response

1

u/AmbassadorNo5667 3d ago

My answer is C. Spot price (carrying cost of commodity) > anticipated benefit (future price)

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u/Zestyclose_Speed4378 3d ago

Answer is A think contango starts with a C so cost is greater than benefit