Basis in the futures market is the difference between:

Basis in the futures market is the difference between:

• A. The cash price minus the futures price
• B. The futures price minus the cash price
• C. The cash price plus the futures price
• D. The cash price times the futures price

Answer: (A)

Basis is the difference between the cash (spot) price and the futures price at a given time. It is defined as cash price minus futures price. This tells you how far apart the two prices are right now. If the cash price is higher than the futures price, the basis is positive; if the futures price is higher, the basis is negative. As the contract nears delivery, futures prices converge toward the cash price, so the basis tends to move toward zero. This relationship is key for hedgers using futures: the effectiveness of a hedge depends on how the cash and futures prices move together. The other options don’t reflect the standard definition: adding, multiplying, or reversing the order would not represent the price difference used in basis.

Basis is the difference between the cash (spot) price and the futures price at a given time. It is defined as cash price minus futures price. This tells you how far apart the two prices are right now. If the cash price is higher than the futures price, the basis is positive; if the futures price is higher, the basis is negative. As the contract nears delivery, futures prices converge toward the cash price, so the basis tends to move toward zero. This relationship is key for hedgers using futures: the effectiveness of a hedge depends on how the cash and futures prices move together. The other options don’t reflect the standard definition: adding, multiplying, or reversing the order would not represent the price difference used in basis.