The curve is in contango. What does that let you do, and what does it cost you?
What they are testing
Whether you can connect a curve shape to an actual trade, rather than reciting a definition.
Contango means forward prices are above spot. That creates the storage trade: buy the physical now, sell a forward, put the barrels in a tank, and collect the difference.
The trade only works if the spread covers the full cost of carry. That is storage rent, financing on the value of the cargo, insurance, and any loss in the tank. If the spread is twenty cents and your all-in carry is twenty-five, the contango is real and the trade is not.
The good answer names the cost of carry without being asked. That is the difference between having read about contango and having priced it.
Answers that lose the room
- Defining contango correctly and stopping there.
- Describing it as free money.
- Forgetting financing cost, which in a high rate environment is usually the largest component.