Hedging with Jorge #Episode26: Borrowing in Backwardation

So, what happens when you borrow in backwardation? Well, the rule is simple—you lose money. Why? Because in a backwardation curve, the nearby price is higher than the future price. That’s just how the market moves!

Let’s break it down:

If you borrow to postpone a short, say from April to May, April’s price is higher than May’s price—you lose money.

If you borrow to anticipate a long, meaning you buy in March instead of April, March’s price is higher—you lose money.

Final Takeaway: Backwardation vs. Contango

Borrowing in backwardation? You lose money.

Borrowing in contango? You make money.

So, keep this rule in mind whether you’re postponing or anticipating!