In futures terminology, which term denotes the difference between the futures price and the local cash price?

In futures terminology, which term denotes the difference between the futures price and the local cash price?

• A. Basis
• B. Spread
• C. Premium
• D. Margin

Answer: (A)

Basis is the difference between the local cash price and the futures price. It’s typically expressed as cash price minus futures price, showing how far the current cash market is from the futures quote for the same commodity. For example, if the local cash price is 100 and the futures price is 105, the basis is -5, meaning the futures are priced higher than the cash market. If the cash price were 110 and the futures 105, the basis would be +5. Basis can widen or narrow over time, and basis risk comes into play for hedgers because cash and futures prices don’t always move in perfect tandem. The other terms don’t describe this price relationship: spread is the difference between two prices or contracts, premium is an extra amount over value, and margin is the collateral required to hold a futures position.

Basis is the difference between the local cash price and the futures price. It’s typically expressed as cash price minus futures price, showing how far the current cash market is from the futures quote for the same commodity. For example, if the local cash price is 100 and the futures price is 105, the basis is -5, meaning the futures are priced higher than the cash market. If the cash price were 110 and the futures 105, the basis would be +5. Basis can widen or narrow over time, and basis risk comes into play for hedgers because cash and futures prices don’t always move in perfect tandem. The other terms don’t describe this price relationship: spread is the difference between two prices or contracts, premium is an extra amount over value, and margin is the collateral required to hold a futures position.