Basis (Futures)
The price difference between the spot (cash) price of an underlying and its corresponding futures price.
Formula
Basis = Spot Price − Futures Price
Basis in futures is defined as: Basis = Spot Price − Futures Price (though some markets use Futures − Spot). A positive basis means the spot price is above the futures price (backwardation); a negative basis means futures are above spot (contango / normal carry).
For equity index futures, basis is closely related to fair value — it reflects dividends expected before expiry minus the cost of carry (risk-free rate). As expiry approaches, basis converges to zero (basis convergence), which is why cash and futures prices align at settlement.
Basis risk arises when a hedger's physical position and the hedging futures contract do not move in perfect tandem — the hedge is imperfect by the amount the basis changes.
Related Terms
Back Month
Any futures contract month beyond the front month; typically less liquid and used for hedging or spread strategies.
BeginnerBasis Convergence
The tendency of a futures price and its underlying spot price to meet as expiration nears, forcing the basis to zero at settlement.
IntermediateCalendar Spread
A spread trade that is simultaneously long one contract month and short another month of the same futures product.
IntermediateCash Settlement
A settlement method where no physical asset changes hands at expiration — the contract settles to a final index or reference price in cash.
BeginnerCheapest to Deliver (CTD)
The specific deliverable bond a short Treasury-futures holder will choose to deliver because it is the least costly to source net of the invoice received.
AdvancedFair Value (Futures vs Index)
The theoretical futures price implied by the spot index, cost of carry, and expected dividends until expiration.
AdvancedHedger
A market participant using futures to offset price risk in an existing exposure — the opposite of a speculator.
Intermediate