Backwardation

A rare situation in the financial markets when the price of a futures contract for deliveries in the distant future is much lower than that for a futures contract for delivery in the near future. This happens in commodities and foreign exchange trading usually due to excessive demand. Normally the price of a contract for future delivery trades at a higher price than the spot price because the contract holder is able to earn interest off the cash by investing it in other ways until delivery becomes due. This is the opposite of contango.

This definition is for general information purposes only