Basis

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.

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.

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

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.

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.

• 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.