What is basis in futures trading?

The basis is the difference between the spot price of a commodity and a futures contract that expires two or more months later. The basis, in futures trading, is not to be confused with the terms "basis price" or "cost basis" which are unrelated to the context of basis trading.

What are basis trading transactions?

They include futures contracts, currency contracts, debt instruments contracts, etc. To execute a basis trading transaction, a trader would simply take a long position for the commodity, derivative, or underlying they perceive to be undervalued and opt for a short position for the underlying or derivative they perceive to be overvalued.

Is the basis risk the same as the cash or futures price?

However, although the basis can and does fluctuate, it is still generally less volatile than either the cash or futures price. Basis risk is the chance that the basis will have strengthened or weakened from the time the hedge is implemented to the time when the hedge is removed.

What are futures and how do they work?

Futures contracts allow players to secure a specific price and protect against future price swings. You can buy futures on commodities like coffee, stock indexes like the S&P 500 or cryptocurrencies like Bitcoin. Leverage and margin problems are risks of futures trading, which is less regulated than stock trading. What are futures?