Quick Answer
The basis is cash price minus futures price: positive is "over," negative is "under." A strengthening basis rises (more positive or less negative) and helps the short hedger; a weakening basis falls and helps the long hedger. The basis narrows toward zero as delivery nears, and for financial futures it reflects cost of carry, not storage or freight.
The whole unit on one sheet: how the basis is defined and driven, what strengthening and weakening mean, and how location, grade, and carry shift the number.
How Is the Basis Determined?
- Basis = cash (spot) price minus futures price. Cash minus futures is the fixed order; reverse it and every conclusion flips.
- Positive basis ("over"): cash is above futures. Negative basis ("under"): cash is below futures. A negative basis is normal, not broken.
- Drivers: local supply and demand, carrying charges (storage, insurance, interest), transportation, deliverable-grade differences, and time to expiration.
- The basis narrows toward zero as delivery nears (convergence), because cash and futures are pulled together by the option to deliver physical against the contract.
What Do Strengthening and Weakening Mean?
- A strengthening basis becomes more positive or less negative. It helps the short hedger (long the cash, short futures) and hurts the long hedger.
- A weakening basis becomes more negative or less positive. It helps the long hedger (long futures) and hurts the short hedger.
- Strengthen and weaken describe direction of change, not sign: 10 under to 5 under is strengthening, even though it stays negative.
How Do Location and Grade Change the Local Price?
- A commercial away from the approved delivery point pays freight to bridge the distance, and that cost is built into the local basis. Farther from delivery means a weaker (more negative) basis; near delivery means a stronger basis.
- A contract is written on a standard par (basis) grade. A premium grade raises the effective price received; a discount grade lowers it.
- Both adjustments are why the same commodity carries a different basis in different places on the same day.
What Is the Basis for Financial Futures?
- For Treasury and short-term-rate futures, the basis reflects cost of carry: coupon income earned minus the short-term financing (repo) cost of holding the security to delivery.
- Positive carry: financing rate is below the instrument's yield. Negative carry: financing rate is above the yield (typical under an inverted curve).
- This is a rate story, not storage and freight, but the futures price still converges to the cash price by delivery.
Which Numbers Matter Most?
| Concept | Formula or rule |
|---|---|
| Basis | Cash price minus futures price |
| Over / under | Positive basis = "over"; negative basis = "under" |
| Strengthening | Basis rises: more positive, or less negative |
| Weakening | Basis falls: more negative, or less positive |
| Who benefits | Strengthening helps the short hedger; weakening helps the long hedger |
| Net selling price | Initial futures price plus ending basis |
| Financial carry | Coupon income minus financing (repo) cost |
Which Gotchas Trip Students Up?
Exam Tip: Gotchas
- Strengthening and weakening describe direction, not sign. A basis moving from 10 under to 5 under has strengthened while staying negative the entire time.
- Strengthening basis helps the SHORT hedger; weakening basis helps the LONG hedger. A question that swaps this pairing, claiming a strong basis is good for the buyer, has it backwards.
- The basis narrows toward zero into delivery; it does not widen. Treating basis as constant, or widening into the delivery month, has convergence backwards.
- Farther from the delivery point means a weaker basis, not a stronger one. Distance drains the local basis because freight must be absorbed.
- Positive carry needs financing BELOW the yield, not above it. An inverted yield curve, where short rates sit above long yields, flips carry negative.
One-Breath Recap
Basis is always cash price minus futures price: positive is "over," negative is "under," and reversing the order flips every conclusion. A strengthening basis (more positive or less negative) helps the short hedger, who is long the cash commodity; a weakening basis (more negative or less positive) helps the long hedger, who will buy later, and both directions describe change, not sign. Local supply and demand, carrying charges, transportation, deliverable grade, and time to expiration all drive the number, and it narrows toward zero as delivery nears. For financial futures the basis is a cost-of-carry story: coupon income minus financing cost, positive when financing sits below the yield and negative when an inverted curve puts financing above it.
Need more than the recap? Read the full The Basis unit.