Trading term

What is Basis?

Basis is the difference between an asset's futures price and its current spot (cash) price. It reflects carrying costs, supply and demand, and time to expiry — and it converges to zero as the contract nears expiration, since a future about to settle must match the spot price. Traders watch basis to gauge conditions and to hedge.

Basis is simply futures price minus spot price (definitions vary, but this is the common one). A positive basis means the future trades above spot (a contango-like condition); a negative basis means it trades below (backwardation-like). Basis captures the 'cost of carry' — storage, financing and any convenience yield — plus the market's expectations, all rolled into the gap between paying now (spot) and later (futures). It's the number hedgers and arbitrageurs watch most closely.

The defining feature of basis is convergence: as a futures contract approaches expiry, its price must close in on the spot price, because at settlement the two are effectively the same thing. So the basis narrows to zero at expiration. This convergence is what makes futures reliable for hedging — a hedger knows the futures and spot will meet — but it also means 'basis risk': if you hedge with a future and the basis moves unexpectedly before expiry, your hedge won't be perfect. Managing basis risk is a core skill in commercial hedging.

Basis converges to zero at expiry
Spot $2000Futures $2020basistodayexpiry · basis = 0Basis = futures − spot, converging to zero at expiry

Basis is the gap between the futures price and the spot price. It reflects the cost of carry and narrows to zero as expiry nears — a future about to settle must match spot. That convergence anchors hedging.

For example

Spot gold is $2,000 and the three-month future is $2,020 — a basis of +$20 (the cost of carry). As expiry nears, that gap shrinks: with a week to go the future might be $2,003, a basis of just +$3. At expiry, futures and spot converge to essentially the same price.

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Why it matters to you

Basis is the link between the futures and cash markets — it's what makes futures usable for hedging, and its convergence to zero at expiry is the anchor that keeps futures tethered to reality. For hedgers, basis (and the risk it moves) is often the real variable that determines whether a hedge works.

⚠ Basis risk breaks 'perfect' hedges

Hedgers assume a futures hedge perfectly offsets their spot exposure, but the basis can move on its own before expiry — a phenomenon called basis risk. If the gap between futures and spot shifts unexpectedly, the hedge gains and losses won't fully cancel. A hedge removes price risk but leaves basis risk, which is why it's never entirely 'free.'

Frequently asked questions

What is basis in futures trading?

Basis is the difference between a futures price and the current spot (cash) price of the same asset — usually futures minus spot. It reflects carrying costs, supply and demand, and time to expiry, and it's watched closely by hedgers and arbitrageurs.

Why does basis converge to zero at expiration?

Because at expiry a futures contract effectively becomes the spot asset — delivery or final settlement happens at the current price. So as expiry nears, the futures price must move toward the spot price, and the basis (the gap between them) narrows to zero.

What is basis risk?

Basis risk is the risk that the gap between futures and spot prices moves unexpectedly before expiry, so a futures hedge doesn't perfectly offset the underlying exposure. It's why hedging with futures reduces price risk but leaves a smaller residual risk that the basis itself shifts.

How do traders use basis?

Hedgers use basis to judge when and how to hedge, since it determines how well futures will offset their cash position. Arbitrageurs trade the basis when it strays from fair carrying cost. And its convergence toward expiry underpins the reliability of futures as a hedging tool.

Related terms

BackwardationBackwardation is when futures prices are lower for later delivery dates — the futures curve slopes downward. It often signals tight near-term supply or strong demand for immediate delivery. For futures holders it creates a positive 'roll yield,' as they sell pricier near-term contracts and buy cheaper later ones.CFD (contract for difference)A CFD (contract for difference) is a derivative where you and a broker agree to exchange the difference in an asset's price between opening and closing the trade. You never own the underlying — you simply profit or lose on the price move, with leverage. CFDs cover stocks, indexes, commodities and crypto, and are popular outside the US, where they're banned.ContangoContango is when futures prices are higher for later delivery dates — the futures curve slopes upward. It usually reflects the costs of storing and financing an asset until delivery. Contango creates a 'roll cost' for anyone holding futures over time, as they repeatedly sell cheaper near-term contracts and buy pricier later ones.DerivativeA derivative is a financial contract whose value comes from — is 'derived' from — the price of an underlying asset like a stock, index, commodity, or currency. Options, futures, and swaps are all derivatives. They let traders speculate on or hedge against price moves without owning the underlying directly.
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