Which of the following is TRUE in normal backwardation?

Which of the following is TRUE in normal backwardation?

Futures prices tend to:

A. fall over the life of the contract because hedgers are net short and have to receive compensation for bearing risk.

B. rise over the life of the contract because speculators are net long and have to receive compensation for bearing risk.

C. fall over the life of the contract because speculators are net short and have to receive compensation for bearing risk.

D. rise over the life of the contract because hedgers are net long and have to receive compensation for bearing risk.

Answer:B

Normal backwardation means that expected futures spot prices are greater than futures prices. It suggests that when hedgers are net short futures contracts,

they must sell them at a discount to the expected future spot prices to get speculators to assume the risk of holding a net long position.

The futures price rises over the life of the contract, which compensates speculators for the exposure of their long positions.