Calculation and mechanics
For the same underlying several futures contracts with different expiry dates trade at the same time. Arranging their prices by time to expiry produces the term structure.
For storable commodities, storage, financing and insurance costs are among the factors that influence the price differences between near and distant contracts. For financial futures, interest rates, dividends or interest rate differentials play a role, for example. Supply and demand, seasonal factors and expectations can also shape the curve.
If later contracts trade higher than near-term ones, this is called contango. If later contracts are lower, it is called backwardation. A term structure does not have to run the same way across all maturities. Individual sections can slope differently.
The gap between two neighbouring contracts is often quoted in percent. Because the intervals between expiry dates differ by market, an annualised view can also be useful. It makes comparisons between markets easier but does not replace taking their different characteristics and seasonal patterns into account.
Gap % = (price next contract / price front contract - 1) x 100
Distinction
The VIX Futures Curve is the term structure of the VIX futures. The IV Term Structure, by contrast, shows the implied volatility of options across different expiry dates, not futures prices.
A Continuous Future links different futures contracts one after another into a continuous price series. The term structure, by contrast, shows several expiry dates at the same time.
Related terms
- Contango and Backwardation (Upward and inverted futures curve)
- Front Month and Month Codes (Front contract, F G H J K M N Q U V X Z)
- Roll Yield (Roll return, roll effect)
- Continuous Future (Continuous contract, ES1!, ES=F)
- VIX Futures Curve (VIX term structure, VX contracts)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.