The difference between futures price and current local cash price is called which term?

The difference between futures price and current local cash price is called which term?

• A. The premium
• B. The basis
• C. The spread
• D. The margin

Answer: (B)

This is about basis—the difference between the local cash price and the futures price. Basis is usually defined as local cash price minus the futures price, so it shows whether cash is trading higher or lower than the futures. The sign matters for hedging: a positive basis means cash is higher than the futures, a negative basis means the futures are higher. This concept helps explain what you’ll actually end up with when you hedge. If the basis changes between the time you hedge and the time you price or deliver, your real revenue can move even if the futures price moved the other way. For example, if cash is 6.00 and the nearby futures is 5.80, the basis is +0.20. If, later, cash is 5.90 and futures are 5.90, the basis has narrowed to zero, changing the hedged outcome accordingly. It’s distinct from the other terms: a premium relates to options, margin is the collateral required to hold a futures position, and a spread usually refers to the price difference between two related futures contracts (not cash versus futures).

This is about basis—the difference between the local cash price and the futures price. Basis is usually defined as local cash price minus the futures price, so it shows whether cash is trading higher or lower than the futures. The sign matters for hedging: a positive basis means cash is higher than the futures, a negative basis means the futures are higher.

This concept helps explain what you’ll actually end up with when you hedge. If the basis changes between the time you hedge and the time you price or deliver, your real revenue can move even if the futures price moved the other way. For example, if cash is 6.00 and the nearby futures is 5.80, the basis is +0.20. If, later, cash is 5.90 and futures are 5.90, the basis has narrowed to zero, changing the hedged outcome accordingly.

It’s distinct from the other terms: a premium relates to options, margin is the collateral required to hold a futures position, and a spread usually refers to the price difference between two related futures contracts (not cash versus futures).