What Is the Relationship between Basis and the ‘Cost of Carry’?

The basis, defined as Spot Price minus Futures Price, is theoretically determined by the negative of the cost of carry (Basis = -Cost of Carry). The cost of carry includes interest, storage, and insurance.

If the cost of carry is positive, the futures price is typically higher than the spot price (contango), meaning the basis is negative. In an efficient market, any deviation of the basis from the negative cost of carry creates an arbitrage opportunity.