A colleague mentioned she saw a few questions on the actual exam regar...

The structure of the futures market is a key concept to master. It is critical that you understand the events that impact market structures and what it means in relation to the basis for the underlying commodity. Let's start with a normal market. A normal market is one where the price of the cash commodity is lower than the price of the front month contract. In a normal market each of the distant month contracts will be priced at successively higher prices. For example, if cash soybeans are priced at $5.12 per bushel and the front month contract of September is trading at $5.15 and December soybeans are trading at $5.20, this is a normal market. A normal market is in the state of contangio which simply refers to the pricing relationship between the cash commodity and the available futures contracts for each month. A normal market is also known as a carrying charge market. Normal market conditions exist when supply of the commodity is abundant. When markets enter a state of backwardation, a supply shortage or shock is reflected in the pricing of the market. During states of backwardation, the price of the cash commodity is priced higher than all of the futures contracts. During backwardation the front month contract is trading higher than the deferred  contracts and each subsequent delivery month is trading at lower prices as the market anticipates the shortage be resolved and the supply to return to normal. Imagine if an unexpected cold snap moved through the corn belt and a substantial amount of this season’s harvest was wiped out. Users of corn would be scrambling to ensure that they can secure the corn on the cash market to meet their needs. As a result the price of cash corn would skyrocket and would exceed the price of all of the futures contracts. In this case we could see a market where cash corn was priced at $7.10 per bushel and the front month priced at $6.95 per bushel with each of the deferred contracts being priced at successively lower prices. Remember in this context the basis refers to the spread between the price of the cash commodity and and the price of the front month contract. In our normal market when cash soybeans are priced at $5.12 per bushel and the front month contract of September is trading at $5.15 the basis would be quoted as 3 cents under. In our corn market subject to a supply shock with cash corn was priced at $7.10 per bushel and the front month priced at $6.95 per bushel the basis would be quoted at 15 cents over.