Futures Basis Explained: Why Futures and Spot Prices Differ

Futures Basis Explained: Why Futures and Spot Prices Differ

A futures price is not supposed to match the spot price every day. The gap between them—called the basis—reflects time, financing, income, storage, scarcity and market positioning. Reading that gap correctly helps traders compare contracts, understand roll costs and avoid treating a normal carry relationship as a trading signal.

বাংলায় পড়ুন: Futures Basis Explained: Futures ও Spot Price কেন আলাদা

Learning objective: calculate spot–futures basis, annualise a simple premium, identify the main drivers across asset classes and understand convergence and cash-and-carry risks.

1. Define the sign before using the number

Two conventions are common:

Basis = futures price − spot price

or

Basis = cash price − futures price

CME's equity-index education uses futures minus spot, while the US Commodity Futures Trading Commission's futures glossary notes that commodity basis is typically quoted as cash minus futures. Both describe the same gap with opposite signs.

This tutorial uses:

Basis = futures − spot

Under this convention, a positive basis means futures trade above spot; a negative basis means futures trade below spot. Always write the convention beside the figure.

2. What cost of carry means

A spot position is owned now. A futures contract sets a price for settlement later. Holding the underlying until that later date may involve benefits and costs:

• financing or the opportunity cost of cash;
• dividends or interest income;
• storage, insurance and transport;
• borrowing and custody costs;
• the operational benefit of having the asset immediately;
• time remaining until expiry.

The difference between carrying the asset and using the futures contract helps establish fair value. Actual futures can move around theoretical fair value because of supply, demand, balance-sheet limits and transaction costs.

CME's fair-value page explicitly notes that short-term supply and demand can make the traded futures price differ from theoretical fair value.

3. Equity-index basis: financing minus dividends

An index-futures buyer receives index exposure without buying every share. The buyer does not receive the component dividends directly. A simplified relationship is:

Futures fair value ≈ spot index + financing cost − expected dividends

If financing cost exceeds expected dividends, futures may trade above the cash index. If expected dividends exceed financing cost, futures may trade below it. The exact calculation uses time to expiry and the timing of dividends.

CME defines equity-index basis as futures price minus spot index and explains that finance charges and dividend income determine whether the contract trades at a premium or discount.

An index level and a futures contract are also different instruments: the index is a calculation, while the futures contract is tradable, margined and expires. A price difference does not by itself mean one is wrong.

4. Gold and oil: storage and convenience matter

For a storable commodity, a simplified carry model includes:

Futures fair value ≈ spot + financing + storage and insurance − convenience yield

Convenience yield is the economic benefit of having physical inventory available—for production, delivery or protection against shortage. It is not a cash coupon visible on a screen, so it is often inferred from prices and other costs.

Gold is relatively durable and compact but still has financing, vaulting and insurance costs. Crude oil requires tanks, location, quality specifications and operational capacity. A headline “oil spot price” may refer to a different location or grade from the futures deliverable asset, so an apparent basis can partly be a specification mismatch.

When deferred futures are above nearby prices, the curve is commonly described as contango. When deferred prices are below nearby prices, it is backwardation. Basis compares spot with a particular futures contract; curve structure compares futures maturities. They are related but not identical.

For contract-to-contract effects, see the contango, backwardation and roll-yield guide.

5. FX: two interest rates drive the gap

An FX pair contains two currencies, so the basis reflects the short-term interest-rate differential between them, as well as quote convention and settlement dates. CME explains that FX futures basis can be positive or negative depending on the relationship between the base- and terms-currency interest rates.

Before comparing FX spot and futures:

1. confirm both use the same quote direction;
2. align the spot settlement date with futures expiry;
3. use interest rates for the matching term;
4. include bid–ask spreads and transaction costs.

One quote may be the reciprocal of another. A large apparent gap can be nothing more than comparing USD/JPY with JPY/USD.

6. Bitcoin: premium is not automatically bullish

Bitcoin futures can trade above or below spot because of financing demand, leverage, custody, borrowing availability, regulated-market access and risk appetite. A futures premium can reflect the cost and convenience of obtaining leveraged exposure rather than a certain prediction that spot will rise.

Different Bitcoin products also have different mechanics:

• dated futures converge towards a settlement reference at expiry;
• perpetual swaps have no expiry and use recurring funding payments;
• exchange, collateral and liquidation rules differ;
• a “spot” price varies across venues.

Compare the exact exchange, contract, settlement index, collateral and timestamp. For perpetual contracts, read the funding-rate tutorial.

7. Worked example: a 90-day futures premium

Suppose a spot asset is £100.00 and a futures contract expiring in 90 days trades at £102.50.

Using futures minus spot:

Basis = £102.50 − £100.00 = +£2.50

As a percentage of spot:

Basis % = £2.50 ÷ £100.00 = 2.50%

A simple annualised approximation is:

Annualised basis ≈ 2.50% × (365 ÷ 90) = 10.14%

A compounded annualised equivalent is:

(1.025)^(365/90) − 1 ≈ 10.53%

Neither figure is an expected investment return on its own. Suppose the matching financing, custody and transaction costs total 1.50% over 90 days. The gross 2.50% premium then leaves 1.00% before taxes, margin effects, execution risk and unexpected costs.

The annualisation also assumes the same opportunity can be repeated throughout the year, which may be false. Basis can disappear, flip sign or become expensive to trade.

8. Convergence does not forecast direction

As expiry approaches, deliverable or cash-settled futures generally converge towards the relevant spot or settlement value. The CFTC explains that a futures contract's delivery provision exists to help ensure convergence between futures and cash prices.

But convergence does not tell the trader how the gap will close. If futures are £2.50 above spot:

• futures may fall while spot stays unchanged;
• spot may rise while futures stays unchanged;
• both may rise, with spot rising faster;
• both may fall, with futures falling faster.

The basis can narrow while both outright positions lose money. Separate the relative-value view from the directional view.

9. Cash-and-carry is not risk-free in practice

A textbook cash-and-carry trade buys the spot asset and sells an overpriced futures contract, aiming to capture convergence. A reverse cash-and-carry does the opposite when feasible.

Real implementation faces:

• spot borrowing or funding changes;
• short-sale and asset-borrow constraints;
• margin calls before convergence;
• different settlement or delivery specifications;
• storage, custody, insurance and transfer risk;
• bid–ask spread, commission and market impact;
• exchange, counterparty and operational risk;
• taxes and regulatory constraints;
• early liquidation at an unfavourable basis.

The CFTC's report on the Treasury cash–futures basis trade describes it as a convergence trade, while also focusing on effective risk-management practices. A small spread supported by high leverage can create a large loss or liquidity demand before expiry.

10. A practical basis workflow

1. Identify the exact spot instrument and futures contract.
2. Synchronise prices to the same timestamp.
3. State whether basis is futures minus spot or the reverse.
4. Calculate point and percentage basis.
5. Record days to expiry and annualisation method.
6. Estimate financing, income, storage, custody and delivery costs.
7. Compare traded basis with theoretical fair value.
8. Stress margin, liquidity and basis widening before convergence.
9. Track the curve and roll separately from spot basis.
10. Close or roll under a written rule before delivery obligations become relevant.

Common mistakes

1. Mixing opposite basis sign conventions.
2. Comparing prices captured at different times.
3. Treating futures premium as a guaranteed bullish forecast.
4. Ignoring dividends in index futures.
5. Ignoring storage, location and grade in commodities.
6. Comparing reciprocal FX quotes.
7. Confusing spot basis with calendar spread or roll yield.
8. Annualising a short-lived premium as if it repeats all year.
9. Calling cash-and-carry risk-free without modelling margin and funding.
10. Holding into delivery without knowing the contract rules.

Basis checklist

• Exact spot and futures instruments matched?
• Same currency, quote unit and timestamp?
• Basis sign convention stated?
• Expiry and settlement method checked?
• Financing and income included?
• Storage, custody or borrow costs included?
• Fair value separated from traded price?
• Convergence path and margin stress tested?
• Calendar roll analysed separately?
• Delivery and liquidation plan written?

The Money Man View

Basis is a bridge between markets, not a free directional signal. It explains what the market charges for time, financing, income, inventory and access. We first make the instruments and timestamps comparable, then subtract realistic carry and execution costs. The remaining spread may contain information, but only after its operational risks are made visible.

Educational risk disclosure

This tutorial uses simplified hypothetical figures and was prepared with AI-assisted research and writing under The Money Man editorial workflow. It is educational information, not personalised investment advice or a recommendation to trade futures. Futures are leveraged, basis can widen before convergence, margin calls can force liquidation and losses can exceed the amount initially deposited.