How Does the ‘Basis’ Relate to the Potential Impact of Settlement?

The basis is the difference between the futures price and the spot price (Futures Price – Spot Price). A positive basis (contango) or negative basis (backwardation) is a key indicator.

As a futures contract approaches expiration, the basis must converge to zero. The process of settlement forces this final convergence, and if the contract is physically-settled, the actual delivery is the final step in basis convergence.