Basis
Also written Basis of a futures contract
The difference between the spot price and the futures price of an asset — positive when spot exceeds futures, negative when futures exceeds spot, and zero at expiry.
In plain language
Two prices exist at the same moment for the same asset: what it costs today, and what a futures contract says it will cost on a date in the future. Basis is the gap between them.
The sign convention in the NISM workbook is the one that trips people up, so fix it now: basis is spot minus futures. If the futures price is greater than spot, the basis is negative. If spot is greater than futures, the basis is positive.
And basis is meaningless on its own. There is a one-month basis, a two-month basis and a three-month basis, all different, all live at once. Naming the contract is part of naming the basis.
How it works
Two properties do all the examinable work.
It goes to zero at expiry. Whatever the basis is during the life of the contract, positive or negative, it must be zero at maturity, because final settlement takes place at the closing price of the underlying. There cannot be a difference between the futures price and the spot price at the moment the contract dies.
The gap between two basis figures is the cost of carry between those two months. The difference between the one-month basis and the two-month basis should equal the cost of carrying the underlying from the first month to the second — the interest on funding it, less any income earned on it. The workbook calls this the fundamental principle that links futures and cash prices together.
For a hedger, basis is the residual risk. You sold futures against a physical holding to lock a price; if the basis moves before you unwind, the hedge does not land exactly where you expected. That is basis risk, and it is the reason a hedge is never perfect when the hedging instrument and the hedged instrument are not identical.
The formula
Basis = Spot price − Futures price
Futures > Spot → basis is negative
Spot > Futures → basis is positive
At expiry → basis = 0
Basis(2-month) − Basis(1-month) = cost of carry between month 1 and month 2
A worked example
On 3 October 2025, Nifty spot closes at 24,894.25 and the near-month Nifty future at 25,006.60.
One-month basis = 24,894.25 − 25,006.60 = −112.35
Negative, because the future is above spot. At a lot size of 25, that gap is Rs 2,808.75 per contract.
Now put a two-month contract beside it. Suppose it quotes 25,120.00:
Two-month basis = 24,894.25 − 25,120.00 = −225.75
Difference in basis = −225.75 − (−112.35) = −113.40
That 113.40 points is the cost of carrying Nifty through the second month — roughly 0.45% of spot for a month, or about 5.5% a year before dividends, which is the sort of number a funding rate should produce. A quote that broke this relationship badly would be an arbitrage signal.
Now watch a hedger get hurt by it. A fund holds Rs 6.25 lakh of index exposure and sells one near-month future at 25,006.60 to lock its value. Three weeks later it unwinds: spot is 24,700 and the future is 24,660, so the basis has swung from −112.35 to +40.
Loss on the cash holding = 24,700 − 24,894.25 = −194.25 points
Gain on the short future = 25,006.60 − 24,660 = +346.60 points
Net = +152.35 points × 25 = +Rs 3,809
The hedge did not return zero. It returned the change in basis — exactly the 152.35-point swing from −112.35 to +40. That is basis risk in one line of arithmetic: a hedger has swapped price risk for basis risk, not for no risk at all.
Why NISM asks about it
Chapter 15.4 (Some important terminology associated with futures contracts) defines basis and gives the 3 October 2025 Nifty figures used above, immediately before cost of carry. Chapter 22 uses basis risk in the interest rate hedging strategies, where the hedged security and the notional underlying of the futures contract are deliberately different. Expect a sign question — "if futures price exceeds spot, the basis is ___" — and a computation of basis from a spot and futures quote.
Common exam traps
- Get the sign right. NISM defines basis as spot minus futures, so a futures price above spot gives a negative basis. Several textbooks use the opposite convention; the exam uses this one.
- Basis without a contract month is incomplete. One-month and three-month basis on the same asset are different numbers.
- Basis becomes zero at expiry, not "approximately zero". Final settlement at the underlying's closing price forces it.
- Basis is not cost of carry. Cost of carry explains basis; the difference between two months' basis is a carry figure.
- A hedge does not eliminate risk, it converts it. Price risk becomes basis risk — the residual that remains when the hedging contract is not identical to the hedged asset.
- Basis can flip sign during the life of a contract as spot and futures move independently. A hedge sized on today's basis is not protected against tomorrow's.
Where this is taught
- Series IV · Chapter 3: Exchange Traded Interest Rate Futuresintroduced here
- Series XVI · Chapter 5: Uses of Commodity Derivativesintroduced here
- Series X-A · Chapter 10: Understanding Derivativesintroduced here
- Series V-D · Chapter 15: Introduction to Forwards and Futuresintroduced here
- Series VIII · Chapter 3: Introduction to Forwards and Futuresintroduced here
- Series V-D · Chapter 20: Exchange Traded Interest Rate Futures
Related terms
- Basis riskThe risk left over after hedging, because the exposure and the contract used to hedge it do not move identically — in size, in expiry date, or in what they are written on.
- ConvergenceThe certainty that a futures price and the spot price of its underlying meet at expiry — because on the last trading day the contract settles at the cash market price, leaving no room for a difference.
- Price discoveryThe process by which the free interaction of buyers and sellers produces a price that reflects every participant's expectation of what the underlying will be worth at a future date.
- Cost of carryThe cost of holding an asset until a future date — financing interest plus storage, less any income it pays. It links spot to futures: fair futures price = spot + cost of carry − inflows.
- Mark to MarketThe daily settlement of a futures position at that day's closing price, so gains and losses are paid in cash every evening instead of accumulating until expiry.
- ArbitragerA participant who locks a profit by entering opposite transactions in two markets at once — carrying no exposure and taking no view, and in the process pulling the two prices back together.
- Cash and carry pricingThe no-arbitrage model for bond futures: theoretical futures price = cash (dirty) price + financing cost − income on the cash position, which is accrued interest to the futures settlement date.
- Expectancy modelThe view that a futures price is simply the market's expected spot price at expiry, so futures can trade at a premium or discount to spot and signal the expected direction of prices.
- Contango and backwardationThe two shapes a commodity futures curve can take — contango when the futures price is above spot, backwardation when it is below.
- BackwardationA market in which the futures price sits below the spot price — the cost of carry says futures should be dearer, and something is overriding it.
- Strengthening basisA change in basis (spot minus futures) towards a more positive or less negative number — spot rising relative to futures — which benefits a short hedger.
- Weakening basisA change in basis (spot minus futures) towards a less positive or more negative number — futures rising relative to spot — which benefits a long hedger.
- UnderlyingThe asset a derivative contract derives its value from — the index, stock, bond or currency whose spot price drives the contract. The derivative has no value of its own without it.
- RolloverCarrying a derivatives position past expiry by closing the expiring contract and opening the same position in the next series simultaneously — the only way to hold a view longer than one contract cycle.
- Seasonality effectThe recurring swing in agricultural commodity prices between the sowing season, when spot supply is tight, and the harvest, when it becomes abundant — the main cause of backwardation in agri commodities.
- Selective hedgingHedging only some of a business's price exposure, based on a market view about which positions to cover — a choice that turns the hedged leg into its own form of speculation.
- Offsetting hedgeA hedge undertaken to offset price risk that has arisen from a physical market activity already carried out — one of the workbook’s two basic hedging strategies, the other being locking in a price.
- Cash and carry arbitrageBuying the underlying in the cash market and simultaneously selling futures when futures trade above their fair price, carrying the asset to expiry to lock in the mispricing.
- Reverse cash and carry arbitrageSelling the underlying in the cash market and simultaneously buying futures when futures trade below their fair price — the mirror image of cash and carry, and it needs stock to sell.
- Long hedgeA hedge made by buying futures to protect against a price rise before a planned future purchase — the gain on futures offsets the higher cash price, locking in roughly the futures price.
- Spot priceThe price at which the underlying asset trades in the cash market for immediate delivery — the anchor from which futures prices, basis, moneyness and final settlement are all measured.
- Carry costThe interest cost built into the gap between a stock's spot price and its futures price, reflecting the cost of funding a spot purchase until the futures contract's delivery date.