Which of the following is true when F0,T

Question

Which of the following is true when F0,T < E(ST)?
A) Occurs when long hedgers outnumber short hedgers.
B) Occurs when short hedgers outnumber long hedgers.
C) The market is said to be in contango.
D) The market is said to be in normal contango.
E) The pure expectations hypothesis holds.

Quizplus · Accepted Answer

When F0,T < E(ST), it means that the price of the futures contract is lower than the expected spot price at expiration. This usually happens when there are more short hedgers than long hedgers in the market, who are willing to sell the futures contract in order to lock in a price for their future sale. This situation is known as a market in backwardation, which is the opposite of contango. Therefore, choices A, C, D, and E are incorrect.

Which of the Following Is True When F0,T < E(ST)