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.
BeginnerHedger
A market participant using futures to offset price risk in an existing exposure — the opposite of a speculator.
Intermediate