Canadian Securities Course (CSC) Level 2 Practice Exam

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Prepare for the Canadian Securities Course (CSC) Level 2 Practice Exam. Study with multiple choice questions and detailed explanations. Ace your exam with comprehensive practice tests!

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What is the primary characteristic of the Contango market in futures trading related to commodities?

  1. Backwardation

  2. No price difference with underlying commodities

  3. Normal futures market

  4. Physical delivery as settlement

The correct answer is: Normal futures market

The primary characteristic of a Contango market in futures trading is that futures prices are higher than the spot price of the underlying commodity. This reflects expectations that the price of the commodity will rise over time, often due to holding costs, storage, and other factors related to the commodity's supply and demand dynamics. In a normal futures market situation, which typically describes a Contango scenario, the shape of the futures curve slopes upwards, indicating that future contracts are trading at a premium to the current market price. In this context, other factors, such as backwardation, physical delivery, and price parity, do not accurately capture the essence of a Contango market. Backwardation describes the opposite situation, where futures prices are below the spot price. Physical delivery refers to how certain futures contracts are settled, which is not a defining feature of Contango. The absence of price differences also doesn't apply under Contango, as this market is characterized specifically by a price differential that favors future contracts.