Basis
The basis is the difference between a futures price and the spot price of the same asset; it narrows toward zero as the contract approaches expiry.
Basis is the gap between the price of something today and the price of a futures contract on it. It tells hedgers how local conditions compare with the wider futures market, and it tends to shrink as the contract nears delivery. Traders who hedge watch basis as closely as price itself.
- Category
- Derivatives
- Reading time
- 4 min
- Also called
- Futures basis, Cash-futures basis, Spot-futures basis
- Updated
Basis in plain words
Basis is how far a commodity's local cash price sits from the nearest futures price — normally calculated as cash minus futures.1
It reflects local supply and demand compared with the wider futures market.2
Some markets quote it the other way round (futures minus spot), so always check which convention a quote uses.
How to work out and use basis
Pick the futures contract
Use the futures contract that expires next; the gap also captures differences in timing, product form, grade or location.1
Get the local cash price
Use the price actually offered where you would buy or sell the physical asset.
Subtract
Cash minus futures gives the basis; a negative number means cash is below futures.
Compare with history
Look at what basis usually does at this time of year in your location.
Plan a hedge
Add your expected basis to a futures quote to estimate the cash price you are likely to get locally.2
Watch convergence
Expect convergence: cash and futures prices tend to draw together, especially in the delivery month.1
Worked examples
Example 1 — Negative basis
Basis −$0.30A hypothetical local cash price is $4.60 and the nearest futures price is $4.90.
| Cash | $4.60 |
| Futures | $4.90 |
| Basis | $4.60 − $4.90 = −$0.30 |
Cash minus futures gives the basis, which is the standard way to quote it.1
Example 2 — Basis strengthens
$0.20 better than plannedA hypothetical hedger sold futures at $5.00 with basis at −$0.40. At delivery, futures are $4.70 and basis has moved to −$0.20.
| Cash at delivery | $4.70 − $0.20 = $4.50 |
| Futures gain | $5.00 − $4.70 = $0.30 |
| Net price | $4.50 + $0.30 = $4.80 |
The final price beat the expected $4.60 because the basis narrowed; by expiry, cash and futures should meet and the basis should be close to zero.2
Example 3 — Basis weakens
$0.30 shortfallA hypothetical hedger expected basis of −$0.20 but it ends at −$0.50 while futures finish at $4.80.
| Expected cash | $4.80 − $0.20 = $4.60 |
| Actual cash | $4.80 − $0.50 = $4.30 |
| Shortfall | $0.30 per unit |
Seasonal basis patterns are a guide only — some years they simply don't play out.2
Basis vs price
| Aspect | Basis | Futures price |
|---|---|---|
| What it measures | Local cash vs futures gap | Market-wide price level |
| Main drivers | Local supply, demand, transport, storage | Global supply and demand |
| Hedge removes it? | No, basis risk remains | Mostly, if hedged |
| Near expiry | Tends toward zero | Converges with spot |
Where basis matters
Hedging crops or fuel
Hedging with Futures Contract locks price level but leaves basis open.
Storage decisions
A wide negative basis can reward holding stock for later sale.
Crypto cash-and-carry
Traders compare Spot Trading prices with Perpetual Futures and dated futures.
Judging local markets
A strong basis signals tight local supply.
Advantages and disadvantages
Advantages
- Shows local conditions that futures prices hide.
- Makes hedged prices easier to forecast.
- Usually more stable than the price level.
- Helps time sales and storage.
Disadvantages
- Basis can move against a hedger (basis risk).
- Sign conventions differ between markets.
- Local cash prices can be hard to observe.
- Historical patterns can break in unusual years.
Going deeper
Read as far as you need. Each level builds on the one before it.
Why basis exists
Beginner
At a local level, basis is the spread between what a buyer bids in cash and the price of the futures contract expiring next.2 Transport, quality and timing all create that gap.
Seasonal patterns
Intermediate
At harvest, when supply is heaviest, basis is usually at its most negative.2 Basis often strengthens later as stocks are used up.
Convergence and arbitrage
Advanced
Physical and futures prices normally move closer as delivery nears.1 If the gap stays too wide, traders can buy one and sell the other, which pulls prices back together.
Common mistakes
Mixing conventions
Cash minus futures and futures minus cash give opposite signs.
Assuming a hedge is perfect
A Futures Contract hedge still carries basis risk.
Using the wrong contract
Basis should usually reference the nearest contract.
Trusting one year of data
Seasonal basis varies from year to year.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Basis is the gap between cash and futures prices.
- The CFTC calculates it as cash minus futures.
- Local supply and demand drive basis.
- Basis tends toward zero near delivery.
- Hedges remove price risk but not basis risk.
Frequently asked questions
Is a negative basis bad?
What is basis risk?
Does basis apply to crypto?
Further learning
- Futures Contract
The contracts basis is measured against.
- Hedging
How basis risk affects a hedge.
- Settlement
What happens at delivery.
- Spot Trading
The cash side of the basis.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- CFTC. CFTC Glossary (opens in a new tab) Checked .
- University of Wisconsin–Madison Extension. Understanding Basis in Grain Marketing (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.