What is Basis in Futures Trading?

Basis is the difference between the spot price of an underlying asset and its futures price. Generally, 

• When the futures price is above the spot price, the basis is “negative”.
• In comparison, when the futures price is below the spot price, the basis is “positive.

A “Basis” can be calculated using the following formula:

• Basis = Spot Price – Futures Price

For example, suppose the Spot price is ₹25,000, and the Futures price is ₹25,100. Now, the Basis would be -₹100 (₹25,000 − ₹25,100). 

Furthermore, note that the basis changes as spot and futures prices move. As a futures contract approaches expiry, the futures price generally “converges” toward the spot price, subject to the applicable market and settlement conditions.

What is the “Basis Risk” in Futures India?

“Basis risk” is the risk that the relationship between the spot price and futures price changes in an unfavourable way and reduces the effectiveness of a hedge. For example,

• Suppose a stock is trading at ₹1,000 in the spot market, and its futures price is ₹1,020. 
• Now, the Basis would be -₹20 (₹1,000 – ₹1,020).

If the position is hedged using futures and the “basis” changes before the hedge is closed, the gain or loss on the futures position may not fully offset the movement in the spot position. This difference is the basis risk. 

It usually arises when the spot and futures prices do not move together as expected, which reduces the effectiveness of a hedge.

Analyse Spot and Futures Prices With Trade246

Basis compares the spot price with the futures price and can change as both prices move toward expiry. Trade246 provides access to NSE and NFO, allowing you to analyse equity prices alongside their futures markets.

Plus, use our advanced TradingView charts, 100+ technical indicators, and professional drawing tools to study price relationships and market trends. Register today and trade across NSE, NFO, US Stocks, Indices, Forex, Commodities, and Crypto at lifetime 0* brokerage.

*Statutory charges and taxes may apply