Which of the following best defines basis in futures markets?

• A. The Difference Between Cash Price And Futures Price
• B. The Price Of The Futures Contract
• C. The Difference Between Bid And Ask
• D. The Expected Value Of The Contract

Answer: (A)

Basis in futures markets is the difference between the cash price of the commodity and the price of the futures contract for the same commodity and delivery month. In formula form, Basis = Cash price − Futures price.

This tells you how the spot market and the futures market relate at a given time. It can be positive or negative. For example, if the cash price is 100 and the futures price is 105, the basis is −5. If the cash price is 110 and the futures price is 105, the basis is +5. The sign indicates whether futures are trading above or below the current cash market, which helps explain conditions like contango (futures above cash) or backwardation (cash above futures).

Understanding basis helps hedgers manage risk because changes in the basis can affect the effectiveness of a hedge. The other concepts listed describe the futures price itself, the bid–ask spread, or an expected value, none of which define basis.