In futures markets, the term basis represents

In futures markets, the term basis represents

• A. The difference between the futures price for a given delivery month and the current local cash market price.
• B. The premium paid for option contracts.
• C. The annual interest rate on a loan.
• D. The difference between the bid and ask prices in the market.

Answer: (A)

The main concept here is the price relationship between the cash market and the futures market for the same commodity and delivery month. The basis represents the difference between the futures price for that delivery month and the current local cash price. If futures are pricier than cash, the basis is positive; if futures are cheaper, the basis is negative. This measure helps traders and hedgers judge how far the futures price is from the actual cash market today, and it tends to move toward zero as the delivery date approaches because futures prices converge to cash prices. The other choices describe different ideas—the cost of an option, an interest rate, or the bid-ask spread—none of which are the basis.

The main concept here is the price relationship between the cash market and the futures market for the same commodity and delivery month. The basis represents the difference between the futures price for that delivery month and the current local cash price. If futures are pricier than cash, the basis is positive; if futures are cheaper, the basis is negative. This measure helps traders and hedgers judge how far the futures price is from the actual cash market today, and it tends to move toward zero as the delivery date approaches because futures prices converge to cash prices. The other choices describe different ideas—the cost of an option, an interest rate, or the bid-ask spread—none of which are the basis.