What Is ‘Basis’ in the Context of Futures Contracts Arbitrage?

The 'basis' is the difference between the price of a futures contract and the price of its underlying asset (the spot price). In theory, the basis should equal the cost of carry (interest and storage) until expiration.

Arbitrageurs exploit deviations from this theoretical fair value. A positive basis (futures price > spot price) leads to cash-and-carry arbitrage.

A negative basis (futures price < spot price) leads to reverse cash-and-carry.