Quick Answer
The net price a hedger receives on a sale or pays on a purchase equals the initial futures price plus the ending basis. This one formula covers both sides. A stronger ending basis raises the net price and helps the seller; a weaker ending basis lowers it and helps the buyer.
The previous section summed both legs to get a net result. This section reads that same number as a price: what the seller effectively banked per bushel, or what the buyer effectively paid. One formula does both. Grain figures are in cents per bushel.
The Net-Price Formula
The master result ties every hedge calculation together:
where the ending basis is the cash price minus the futures price at the moment the hedge is lifted.
- This single formula covers both the short hedger's net selling price and the long hedger's net buying price. You do not need two procedures.
- Equivalent working form: net price equals the cash price at the lift, adjusted by the futures gain or loss. The sign depends on the side:
- A short hedger (seller) adds a futures gain and subtracts a futures loss from the cash sale price.
- A long hedger (buyer) subtracts a futures gain and adds a futures loss to the cash purchase price.
- Both working forms collapse back to initial futures plus ending basis, because cash plus the short's futures result (or cash minus the long's futures result) rearranges to initial futures plus (cash minus ending futures).
Think of it this way: the futures leg locks the big number (the initial futures price). The basis is a small adjustment stapled on at the very end. Whatever the basis turns out to be at the lift is exactly what gets added to that locked futures price to give the final price.
Worked Short-Hedge Net Selling Price
A soybean producer hedges by selling futures at 885 when the local basis is expected near 10 under. At harvest the hedge is lifted: cash is 840 and futures are 850 (basis 10 under, as expected).
| Step | Cash market | Futures market |
|---|---|---|
| Initial futures action | (no cash sale yet) | Sell futures at 885 |
| Cash transaction (hedge lifted) | Sell beans at 840 | (holds short) |
| Offsetting futures action | (beans sold) | Buy back futures at 850 |
| Result per bushel | Receives 840 | Gain of 35 (sold 885, bought 850) |
| Net selling price | 840 + 35 = 875 |
- Formula cross-check: ending basis = 840 minus 850 = -10. Initial futures 885 plus ending basis (-10) = 875, the same net selling price.
- Had the basis come in stronger than 10 under (say only 5 under), the net selling price would have been higher (880). A stronger ending basis lifts a seller's net even after a price decline.
Exam Tip: Gotchas
- The net selling price adds the futures gain to the cash sale. The producer sold beans at only 840, but the short futures gained 35, so the effective sale is 875, not 840. Reporting the bare cash 840 (or the futures gain 35) alone misses the hedge.
Worked Long-Hedge Net Buying Price
A corn processor hedges by buying futures at 425 when the local basis is expected near 5 over. Prices then rise: the hedge is lifted with cash at 475 and futures at 470 (basis 5 over, as expected).
| Step | Cash market | Futures market |
|---|---|---|
| Initial futures action | (no cash buy yet) | Buy futures at 425 |
| Cash transaction (hedge lifted) | Buy corn at 475 | (holds long) |
| Offsetting futures action | (corn bought) | Sell futures at 470 |
| Result per bushel | Pays 475 | Gain of 45 (bought 425, sold 470) |
| Net buying price | 475 - 45 = 430 |
- Formula cross-check: ending basis = 475 minus 470 = +5. Initial futures 425 plus ending basis (+5) = 430, the same net buying price.
- Had the basis come in weaker than 5 over (say 5 under), the net buying price would have been lower (420). A weaker ending basis helps a buyer even after a price rise.
Exam Tip: Gotchas
- The net buying price subtracts the futures gain from the cash purchase. The processor paid 475 in cash, but the long futures gained 45, so the effective cost is 430, not 475. The buyer subtracts where the seller adds.
Basis Direction: Who a Basis Move Helps
The two hedgers root for opposite basis moves, and the pairing never flips. Since net price is initial futures plus ending basis, a change in the ending basis flows straight into the net price, in the same direction the basis moved.
| Ending basis | Effect on net price | Short hedger (seller) | Long hedger (buyer) |
|---|---|---|---|
| Stronger (higher / less negative) | Raises net price | Helped: higher net selling price | Hurt: higher net buying price |
| Weaker (lower / more negative) | Lowers net price | Hurt: lower net selling price | Helped: lower net buying price |
Memory Aid: A strong basis is a strong result for the seller (all three start with s). The buyer is the mirror: a weaker basis means a cheaper purchase, so weaker helps the buyer.
Exam Tip: Gotchas
- Stronger basis helps the SELLER; weaker basis helps the BUYER. This is worth memorizing cold, because the trap swaps them and claims a strong basis is good for the buyer. Anchor it to the seller owning the cash commodity: anything lifting cash relative to futures lifts the seller's net.
- A stronger basis can still be negative. "Stronger" is the direction of the move, not the sign. Moving from 10 under to 5 under strengthens the basis and raises the seller's net, even though the basis stays under the whole time.
Commissions Reduce the Net
The formulas above are before transaction costs. Trading the futures leg incurs a brokerage commission, charged as a round-turn that covers both entering and exiting the futures position and usually quoted per unit.
- Effect on the net: a commission lowers the short hedger's net selling price and raises the long hedger's net buying price, since it is a cost the hedger bears either way. In the soybean example, a small round-turn cost would trim the net selling price a fraction below 875.
- Keep it simple: unless a question supplies a commission figure, compute the net from initial futures plus ending basis first, then subtract it (seller) or add it (buyer) at the very end.
Think of it this way: the commission is the toll for using the futures road. It always comes out of your pocket, so it shaves a little off what the seller keeps and adds a little to what the buyer pays, no matter which way prices moved.
Exam Tip: Gotchas
- A commission always works against the hedger, so watch the direction by side. It lowers a seller's net and raises a buyer's net. Applying it the wrong way (adding it to a seller's proceeds) inflates the answer. Handle it last, after the initial-futures-plus-ending-basis figure is set.