The term that describes the price difference between a local cash price and the futures price is what?

The term that describes the price difference between a local cash price and the futures price is what?

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

Answer: (A)

Basis is the price difference between the local cash price and the futures price for the same commodity and delivery period. It can be cash minus futures, so it can be positive or negative depending on whether local prices are above or below the futures price. This gap reflects factors like transportation costs, local supply and demand, storage, and quality differences. As the delivery month nears, futures prices tend to move toward the cash price, so the basis generally narrows toward zero. Farmers and others hedge price risk by watching basis to gauge how well a hedge will perform. Premium, spread, and margin describe different concepts: a premium is extra value added to a price, a spread is a difference between two prices or contracts, and margin is the collateral required to hold a position.

Basis is the price difference between the local cash price and the futures price for the same commodity and delivery period. It can be cash minus futures, so it can be positive or negative depending on whether local prices are above or below the futures price. This gap reflects factors like transportation costs, local supply and demand, storage, and quality differences. As the delivery month nears, futures prices tend to move toward the cash price, so the basis generally narrows toward zero. Farmers and others hedge price risk by watching basis to gauge how well a hedge will perform. Premium, spread, and margin describe different concepts: a premium is extra value added to a price, a spread is a difference between two prices or contracts, and margin is the collateral required to hold a position.