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!