In futures markets, what is the basis?

In futures markets, what is the basis?

• A. The difference between the futures price and the current local cash price
• B. The spread between two futures contracts
• C. The premium paid for options
• D. The margin required to enter a trade

Answer: (A)

Basis is the difference between the cash price you could get today for the commodity and its futures price. It shows how the immediate cash market compares to the price in the futures market and can be either higher or lower than the futures price. The other ideas describe a spread between futures contracts, the premium of an option, or the margin required to trade, none of which define basis. So describing basis as the difference between the futures price and the current local cash price is the correct interpretation.

Basis is the difference between the cash price you could get today for the commodity and its futures price. It shows how the immediate cash market compares to the price in the futures market and can be either higher or lower than the futures price. The other ideas describe a spread between futures contracts, the premium of an option, or the margin required to trade, none of which define basis. So describing basis as the difference between the futures price and the current local cash price is the correct interpretation.