Mastering the Commodities Markets

UNDERSTANDING THE ‘BASIS’

This is important when you use futures for hedging.

The ‘basis’ is the difference between where the future is trading now and where the spot rate is trading now; it is a function of storage, timing and cost of carry. The basis will be different for each futures contract as each one represents a different future date. The basis is continually changing and may be positive or negative depending upon whether the future is trading higher or lower than the current spot rate. It is also incredibly difficult to hedge. The only firm certainty is that by the expiry date of the futures the cash market price and the futures price will converge. Traders may take speculative positions depending on whether they believe that the basis ...