Chartered Financial Analyst (CFA) Practice Exam Level 2

What characterizes a positive calendar spread in futures markets?

1. It indicates the market is in contango

2. It associates with futures markets that are in backwardation

3. It shows that futures prices are decreasing

4. It indicates price stability in the market

The correct answer is: It associates with futures markets that are in backwardation

A positive calendar spread in futures markets is characterized by the difference in prices between futures contracts with different expiration dates. When the spread is positive, it typically means that the futures price for the longer expiration date is higher than that for the shorter expiration date. This situation is often correlated with a market in contango. Contango occurs when future prices are higher than the spot price or the nearby futures price. Therefore, a positive calendar spread reflects expectations of rising prices over time, where the longer-dated futures contracts are priced higher due to carrying costs and expectations of further price increases. The option that mentions associating with futures markets that are in backwardation is not accurate. Backwardation describes a condition where futures prices are lower than the expected future spot prices, which would create a negative calendar spread, contradicting the premise of a positive one. Understanding these dynamics is crucial for traders, as it influences their strategies regarding allocations to different maturities in the futures markets.