Basis
Family XII · Other terms
Not to be confused with basis point.
Basis is the gap between two prices for the same or a closely related asset, most commonly the spot price and a futures price. It is usually quoted as the futures price minus the spot price, so a positive basis indicates futures trade above spot and a negative basis indicates the reverse. The basis converges toward zero as the futures contract approaches expiry, because the two prices must meet at delivery.
How basis is quoted and used
In commodity and financial futures markets, basis is typically calculated as:
- Basis = Futures price − Spot price (sometimes the reverse convention is used, so the sign must be checked).
A positive basis is called a contango when referring to the futures curve; a negative basis is called backwardation. Traders watch basis to gauge storage costs, convenience yield, and market tightness. In fixed income, basis can also refer to the yield spread between a bond and a benchmark, or between cash and futures.
Worked example
Suppose the spot price of a commodity is $100 per unit and the three-month futures price is $104.
If the spot price later rises to $103 while the futures price stays at $104, the basis narrows to +$1. At expiry, the basis is zero by definition.
What moves the basis
Basis changes with supply and demand for immediate delivery versus future delivery, interest rates, storage costs, and expectations about future prices. In normal markets, the basis for a storable commodity reflects the cost of carry: storage, insurance, and financing. When the basis is negative (backwardation), it often signals current scarcity or high convenience yield. Because basis is a spread, it is used in hedging and arbitrage strategies, and its behaviour varies by market, contract specification, and delivery terms.
Often confused with
- basis point
- A basis point is a unit of measure equal to one hundredth of a percentage point (0.01%), used to express changes in interest rates or yields, whereas basis is a price difference between two markets; the visible sign is that basis points are always small percentages, while basis is quoted in the same currency units as the underlying asset.