Question

Although normal backwardation, contango, and the net hedging hypothesis allow the existence of a risk premium to compensate for the uncertainty in the future spot price, ST, it is based on the notion of total variability (variance or standard deviation) of ST instead of the systematic risk, beta." True or false

Answer 1

TRUE

As per the normal backwardation theory the suppliers are natural hedgers who try to use futures to reduce risk of fluctuations in selling price. As per contango theory the buyers are natural hedgers who use futures to reduce fluctuation of purchase price. As per the net hedging hypothesis both demand and supply side of the underlying asset have natural hedgers. All these theories recognise the existence of market premium. However they use mean and standard deviation rather than beta.