Question

A contract's volume on a given day was 500. If this contract trades in accordance with the concept of (pure) normal backwardation, then what positions would definitely not occur on that day?

a. A hedger who goes long 0 contracts, a speculator who goes long 500 contracts

b. A hedger who goes short 500 contracts, a speculator who goes long 500 contracts

c. A hedger who goes long 0 contracts, a hedger who goes short 500 contracts

d. A speculator who goes long 500 contracts, a speculator who goes short 0 contracts.

e. A hedger who goes long 500 contracts, a speculator who goes short 500 contracts

Answer 1

Since the market is in pure normal backwardation contracts will be traded below at the spot price. In this case hedger should go short and speculators should go long because hedger will try to lock the price at the higher price and speculator will try to get the return on the adverse market conditions.

Thus after looking into all the options only option e is not occur on that day because here hedger is long and speculator is short. Thus the correct answer is option e.