Spot-Futures Basis
The difference between the spot price and a futures price for the same commodity — the numerical expression of carry, storage, and convenience yield.
Formula
Basis = Spot Price − Futures Price
The spot-futures basis is the arithmetic difference between the cash (spot) price and the futures price: Basis = Spot − Futures. In a normal contango market, the basis is negative (spot is lower than futures). In backwardation, the basis is positive.
The basis narrows (converges to zero) as the futures contract approaches delivery — a process called basis convergence. Traders who hold physical commodity and hedge with futures lock in a profit equal to the basis at hedge initiation, assuming convergence occurs as expected.
Unexpected basis moves (basis risk) are the primary residual risk for hedgers in commodity markets. A producer who sold futures to hedge may find that their local cash price diverges from the futures benchmark at delivery, creating profit or loss beyond the hedge.
Related Terms
Backwardation
A futures market where near-term contracts trade at a premium to deferred contracts, generating positive roll yield and signalling near-term supply tightness.
AdvancedBasis Convergence
The tendency of a futures price and its underlying spot price to meet as expiration nears, forcing the basis to zero at settlement.
IntermediateContango
A market structure where futures prices are higher than the current spot price, creating negative roll yield for long futures holders.
AdvancedFutures Curve
The graph of futures prices across successive delivery months for a commodity, revealing whether the market is in contango or backwardation.
IntermediateSpot Price
The current market price at which a commodity can be bought or sold for immediate delivery.
BeginnerSpread Trade (Commodities)
A trade that goes long one commodity contract and short a related one — exploiting price relationships between grades, delivery months, or related products.
Intermediate