How Does a “Basis Trade” Exploit the Difference between a Dual-Settlement Contract and Its Spot Price?

A basis trade involves simultaneously taking an opposite position in the derivative contract and the underlying spot asset to profit from the expected convergence of their prices. In a dual-settlement contract, a trader might, for example, short the futures contract and long the spot asset, betting that the futures price (which is often cash-settled) will fall back in line with the spot price as expiration approaches, capturing the initial basis difference as profit.