What Is the Concept of ‘Basis’ in Futures Trading and How Is It Calculated?

The basis is the difference between the price of the futures contract and the price of the underlying spot asset. It is calculated as: Basis = Futures Price – Spot Price.

The basis is crucial for traders engaging in arbitrage or hedging, as it represents the profit or loss potential of a market-neutral strategy. The basis is expected to converge to zero as the futures contract approaches its expiration date.