Futures basis

The basis is the difference between a futures contract's price and the current spot price of the underlying asset. Traders and hedgers watch it closely because it captures the cost of carrying the asset over time, things like storage, financing, and any income the asset throws off, and because it tends to shrink toward zero as a contract approaches expiration, since the futures price and spot price must converge by the time the contract settles.

The formula is:

Many sources define basis the other way round, as spot price minus futures price, so check which convention a source uses before reading its sign. Under the convention above, a positive basis means the futures price sits above the spot price, which is the more common condition for financial futures and many commodities. A negative basis means futures trade below spot. The basis does not stay fixed between now and expiration, and unexpected changes in it, known as basis risk, are one of the main reasons a hedge built with futures does not perfectly offset a position in the underlying asset. A company hedging future fuel purchases with oil futures, for example, is protected against a broad move in oil prices, but still bears some risk that the basis between its specific fuel type and the futures contract's underlying grade moves against it.

For traders rather than hedgers, watching the basis also gives a read on supply and demand conditions in the physical market. A basis that widens sharply beyond its normal seasonal pattern often signals a shortage or surplus in the physical market over the coming weeks that the futures price has not yet fully reflected.