In futures trading, the basis is defined as the difference between which two prices?

In futures trading, the basis is defined as the difference between which two prices?

• A. Cash Price and Futures Price
• B. Futures Price and Retail Price
• C. Cost and Price
• D. Price and Revenue

Answer: (A)

Basis measures the difference between the cash (spot) price and the futures price for the same commodity. This tells you how far apart the price you could get today is from the price agreed in the futures contract. The basis can be positive or negative and typically moves toward zero as the contract approaches delivery because the futures price and cash price converge. So the basis is the cash price minus the futures price. For example, if the cash price is 6.50 and the nearby futures price is 6.60, the basis is -0.10; if the cash price is 6.70 and the futures price is 6.60, the basis is +0.10. The other options don’t describe this two-price relationship.

Basis measures the difference between the cash (spot) price and the futures price for the same commodity. This tells you how far apart the price you could get today is from the price agreed in the futures contract. The basis can be positive or negative and typically moves toward zero as the contract approaches delivery because the futures price and cash price converge. So the basis is the cash price minus the futures price. For example, if the cash price is 6.50 and the nearby futures price is 6.60, the basis is -0.10; if the cash price is 6.70 and the futures price is 6.60, the basis is +0.10. The other options don’t describe this two-price relationship.