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LSDefine
Simple English definitions for legal terms
backwardation
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A quick definition of backwardation:
Backwardation: When someone sells something but needs more time to deliver it, they may have to pay a fee to the buyer. This fee is called backwardation. It's like a penalty for not delivering on time.
Backwardation is often used in the securities market, where buyers and sellers trade stocks and bonds. If a seller can't deliver the securities on the agreed-upon date, they may have to pay backwardation to the buyer. This helps ensure that the buyer doesn't lose money because they couldn't get the securities they wanted when they wanted them.
Overall, backwardation is a way to make sure that transactions are fair and that everyone gets what they need. It's like a way of saying "sorry" when things don't go according to plan.
A more thorough explanation:
Definition: Backwardation is a fee paid by the seller of securities to the buyer to allow delivery after the original delivery date.
For example, if a seller of oil futures contracts cannot deliver the oil on the agreed-upon date, they may pay a fee to the buyer to extend the delivery date. This fee is known as backwardation.
Another example is in the stock market. If the price of a stock for future delivery is lower than the current price, it is said to be in backwardation. This means that investors are willing to pay a premium to receive the stock now rather than in the future.
Backwardation is a way for sellers to avoid defaulting on their delivery obligations and for buyers to receive compensation for the delay in delivery.