What Is the “Basis” in Futures Trading, and How Does Arbitrage Affect It?
The basis is the difference between the price of the futures contract and the price of the underlying asset (the spot price or index). Arbitrage activity, specifically index arbitrage, drives the futures price toward the spot price, narrowing the basis.
This action ensures that the futures contract price accurately reflects the underlying asset's value.
Glossar
Spot Price
Valuation ⎊ The spot price in cryptocurrency, options, and derivatives represents the current market-clearing price for immediate delivery of the underlying asset, functioning as a fundamental benchmark for pricing more complex instruments.
Futures Price
Derivatives ⎊ The futures price, within cryptocurrency and financial derivatives, represents the contractual agreement to buy or sell an asset at a predetermined price on a specified future date.
Time to Expiration
Decay ⎊ Time to Expiration, within cryptocurrency options and financial derivatives, represents the remaining lifespan of a contract before its termination and potential exercise or assignment.
Underlying Asset
Foundation ⎊ The concept of an Underlying Asset, within cryptocurrency derivatives and financial markets, establishes the core reference point for valuation and risk transfer.
Futures Contract Price
Contract ⎊ The futures contract price represents the agreed-upon value for an asset, delivered at a specified future date.
Futures Contract
Leverage ⎊ Futures contracts in cryptocurrency represent agreements to buy or sell an underlying asset at a predetermined price on a future date, functioning as a derivative instrument that allows for amplified exposure without immediate asset ownership.