If the futures price increases while the cash price remains unchanged, what happens to the basis?

If the futures price increases while the cash price remains unchanged, what happens to the basis?

• A. It increases
• B. It decreases
• C. It stays the same
• D. It becomes negative and fixed

Answer: (B)

Basis is the difference between the cash (spot) price and the futures price for the same commodity and delivery. It can be written as basis = cash price − futures price. If the cash price stays the same and the futures price rises, the difference gets smaller. For example, with cash at 100 and futures moving from 105 to 110, the basis changes from 100 − 105 = −5 to 100 − 110 = −10. The basis has decreased (become more negative). This can even turn positive into negative if the futures price climbs above the cash price.

Basis is the difference between the cash (spot) price and the futures price for the same commodity and delivery. It can be written as basis = cash price − futures price.

If the cash price stays the same and the futures price rises, the difference gets smaller. For example, with cash at 100 and futures moving from 105 to 110, the basis changes from 100 − 105 = −5 to 100 − 110 = −10. The basis has decreased (become more negative). This can even turn positive into negative if the futures price climbs above the cash price.