Define the Term ‘Basis’ in Futures Trading

Basis is simply the difference between the current spot price of the underlying asset and the futures contract price for that asset. It is typically calculated as: Basis = Spot Price – Futures Price.

The basis can be positive (contango) or negative (backwardation). It reflects factors such as the cost of carry, supply and demand dynamics, and expectations for future spot prices.

For a perfect hedge, the basis would be zero at expiration.