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# Futures and forward curves

Normal and Inverted Futures Curves. Created by Sal Khan.

## Want to join the conversation?

• At I don't understand the argument Sal makes about arbitrage. Can anyone explain please? Thanks
• I believe the arbitrage argument at is like this:

In the case of apples, it's expected for the price to increase over time (inflation), so we should expect a "normal curve" -- the upward-sloping curve. However, if we see an inverted curve, that means that someone is willing to sell the apples to us at a cheaper price right here. And knowing that an apple's price should go up in price over time, we should be able to find another place where this will hold true. So we buy the future here at a cheap price (downward-sloping curve), and we find a market somewhere else with a normal, upward-sloping curve -- an increased price -- and we sell there.

So the inferred part about his arbitrage statement is that there's a "market inefficiency" that lets us buy cheap right here, and we will then sell somewhere else for a higher price later.
• Hello, i would like to know where is the video explaining the downward sloping curve. thank you :)
• What's the difference between a forward curve and a spot curve ?
(1 vote)
• A spot curve will represent the spot prices across a chosen time frame, for example, a calendar year. A spot curve can only be drawn in retrospective i.e. only for a stretch of time in the past. A spot curve will never change once drawn, as it represents the spot price at various points in time across a chosen time frame.
A forward curve represents the forward prices at chosen points of time, relative to today. A forward curve is always drawn starting at today's price and shows future prices. It is not constant. For e.g. the forward curve may show the price of a commodity for delivery as \$10 two months from now, but a month later, this price may change.
• are the forward contracts are only used in commodities?
• Forward contracts exist for all asset classes and can be found as Exchange listed contracts in the form of Futures, or Over-the-Counter (OTC), traded between banks, investment banks, market makers, etc., and their clients, as long as the client has the capability which is checked by the risk department of the market maker making the price. The risk department will check the credit of the client, and then enter into forward contracts if the client asks for a price or needs a forward contract deal structured.
• what determines these prices?
• These prices are determined, just like spot prices, by the laws of demand and supply. However, futures prices are also determined by spot prices themselves, the risk free interest rate prevailing in the market at the time, as well as the length of the contract.
• Can you explain the terms 'contango' and 'backwardation'? Is it to do with futures prices trading above or below the expected spot price at contract maturity?