In normal backwardation, the forward price is typically below what?

In the context of normal backwardation, the forward price is typically below the expected future spot price. This concept originates from the nature of futures markets and the expectations of traders regarding the future price movements of an underlying asset.

Normal backwardation suggests that futures prices tend to be lower than the expected future spot price because it reflects a risk premium paid by hedgers to speculators for taking on the risk of price fluctuations. Investors believe that, in a normal backwardation scenario, the price of the underlying asset will rise in the future, making them favor buying the asset at a price expected to be lower than its actual future value. As a result, the forward price is positioned lower than this anticipated higher future value, incentivizing the market participants to enter these contracts.

Understanding this relationship is crucial as it underscores the risk-return trade-off in futures markets and helps market participants strategize on pricing and contract decisions based on expected price movements.