Contagion vs. Contango vs. Backwardation
Defining these three (3) words in an investors point of view would be the best approach of analyzing the market today. First let's start with 'Contagion' which simply means that when there exist an economic crisis which happens there is such a crisis in Europe would have to spread over affected nearby countries that has similar financial crisis. Secondly, 'Contango' is well defined as such that distant prices for futures exceeds the Spot market prices which happens to be the opposite of 'Backwardation' whereby futures prices are much lower than the nearby months of the futures contracts which is higher. Since the financial futures are inversely related with the Spot market prices to convert them is necessary to find the comparative rates.
With that said, the correlation of spot and futures prices in foreign exchange trading is a must know for investors and traders dealing in this market either on a speculative form or as a hedger. Hedging strategies by bank invitationals, funds/portfolio managers, foreign exchange strategists and sophisticated investors do have a mixture of trade applications which utilizes the potential and weakness of these markets. For the obvious reasons that their investment funds far exceeds that of the main street investors with barely enough funds to spread and build risk management strategies in part of their trading solutions for their portfolio.
Access to these markets can only provide a more sophistication in trading the Foreign Currency market that enables the investors alongside their market strategist to take advantage of the strength and weakness of the market in certain conditions such as what is currently being experienced in today's market.
With the possibility of QE3 up in the air with inflation as a backdrop as mentioned by Bernanke, a new round of policies being debated on handling more flexibility and boosting of the recent funds bailout amounting to 750B and China's inflationary control on hot money in their economy are just some of the hot button issues that needs to be addressed in a global perspective.
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