In marketing, the difference between a futures contract price for a given delivery month and a current local cash market price is called

In marketing, the difference between a futures contract price for a given delivery month and a current local cash market price is called

• A. Basis
• B. Spread
• C. Premium
• D. Margin

Answer: (A)

Basis is the difference between the local cash price and the futures price for the same commodity and delivery month. It shows how close the cash market is to what the futures market implies for the future delivery. This helps hedgers judge price risk and how well a futures hedge will work. For example, if cash is $4.50 and the futures price for the delivery month is $4.60, the basis is $4.50 minus $4.60, or −$0.10. If the basis tightens, cash and futures move closer together; if it widens, they diverge. The other terms describe different ideas: a spread is a difference between two futures contracts or markets, a premium is extra cost for an option, and margin is the collateral required to hold a futures position.

Basis is the difference between the local cash price and the futures price for the same commodity and delivery month. It shows how close the cash market is to what the futures market implies for the future delivery. This helps hedgers judge price risk and how well a futures hedge will work. For example, if cash is $4.50 and the futures price for the delivery month is $4.60, the basis is $4.50 minus $4.60, or −$0.10. If the basis tightens, cash and futures move closer together; if it widens, they diverge. The other terms describe different ideas: a spread is a difference between two futures contracts or markets, a premium is extra cost for an option, and margin is the collateral required to hold a futures position.