How Does “Contango” and “Backwardation” Relate to Basis Risk in Futures?
Contango is a market state where the futures price is higher than the spot price, and backwardation is where the futures price is lower than the spot price. These conditions create a non-zero basis.
If a hedger is short a futures contract in contango, they face a negative cost of carry as the futures price converges down to the spot price, which is a form of basis risk.
Glossar
Negative Cost of Carry
Arbitrage ⎊ Negative cost of carry emerges within cryptocurrency derivatives markets, particularly concerning perpetual swaps and futures, where funding rates can invert, creating a scenario where short positions accrue a yield.
Futures Price
Derivatives ⎊ The futures price, within cryptocurrency and financial derivatives, represents the contractual agreement to buy or sell an asset at a predetermined price on a specified future date.