A brief illustration of how differential or basis trading is impacted by an inverted futures market (in which the distant months trade at a discount to the front months)

1. Differential Trading Normal vs. Inverted Markets David Joelson iRely LLC January, 2011

4. Graphic Illustration of Normal Market Cost increases at a rate of 1 cent/month Futures market ‘steps up’ over time at about the same rate as cost of carry Differential each month is tight around the average of about 19.4 cents Differential

6. Graphic Illustration of Inverted Market Cost increases at a rate of 1 cent/month Inverted Futures market is lower in distant months reflecting tight supplies today Differential each month steadily increases from + 20 cents spot to +34 at year end. Average is more than + 26 cents Differential