Basis is defined as the difference between which two prices for the same commodity?

Basis is defined as the difference between which two prices for the same commodity?

• A. The cash price minus the futures price
• B. The futures price minus the cash price
• C. The storage cost minus the futures price
• D. The insurance premium minus the cash price

Answer: (A)

Basis measures how far the cash price is from the futures price for the same commodity. It is defined as cash price minus futures price. This difference can be positive or negative, showing whether the local market is trading above or below the price implied by the futures contract. For example, if the cash price today is $5.00 and the nearby futures price is $4.80, the basis is $0.20 (positive). If the cash price is $4.60 and the futures price is $4.70, the basis is -$0.10 (negative). The sign and size of the basis reflect factors like storage costs, transportation, and local supply and demand, and they affect hedging decisions since basis can change as those factors shift.

Basis measures how far the cash price is from the futures price for the same commodity. It is defined as cash price minus futures price. This difference can be positive or negative, showing whether the local market is trading above or below the price implied by the futures contract.

For example, if the cash price today is $5.00 and the nearby futures price is $4.80, the basis is $0.20 (positive). If the cash price is $4.60 and the futures price is $4.70, the basis is -$0.10 (negative). The sign and size of the basis reflect factors like storage costs, transportation, and local supply and demand, and they affect hedging decisions since basis can change as those factors shift.