Basis
Quantitative Finance glossary · Quantitative Finance
Definition
Difference between futures and spot: Basis = F_t - S_t. Under cost-of-carry: F_t = S_t · e^(r - q)(T-t), so basis reflects financing minus dividend/convenience yield. Positive basis (contango) is the normal commodity regime when storage costs dominate; negative basis (backwardation) signals scarcity or a high convenience yield. As t to T basis converges to zero by no-arbitrage; the convergence trade is the canonical basis arbitrage. In fixed-income, 'basis' more often means the asset-swap spread or the cash-CDS basis.
Basis in plain English
"Basis" is just the gap between two prices for the same thing: the price to buy it for delivery later (the futures price) minus the price to buy it right now (the spot price). Why does a gap exist? Because owning something later versus now involves real costs and perks — you save your cash a bit longer (interest), but you also miss out on stuff like dividends, and for physical goods you might pay to store it or value having it on hand. Think of pre-ordering a video game versus buying it today: the pre-order price differs because of what happens in between. A key rule: as the delivery date arrives, the two prices must snap together (otherwise you'd get free money buying one and selling the other), and traders bet on exactly that convergence.
Learn these first
Related Quantitative Finance terms
Quantitative Finance practice questions · Quantitative Finance flashcards · Quantitative Finance study guide