How the Basis Is Determined
Chapters in this video
- 0:00 The cash minus futures formula and Fiona versus Trey
- 1:37 Why reversing the subtraction inverts every conclusion
- 2:52 Over versus under: reading the sign correctly
- 4:00 Five local drivers that push basis around
- 5:24 Carrying charges: storage, insurance, and interest
- 5:58 The convergence race to zero at delivery
- 6:57 Price risk swapped for basis risk
- 8:19 The ultimate hedge win-or-lose puzzle
What this video covers
- The exact subtraction order for basis, why cash minus futures is fixed, and how reversing it inverts every strengthening or weakening conclusion
- What positive basis (cash "over" futures) and negative basis (cash "under" futures) mean in trader terminology, and why a negative basis is normal rather than broken
- The five drivers of basis movement: local supply and demand, carrying charges, transportation, deliverable grade differences, and time to expiration
- How carrying charges (storage, insurance, and interest on tied-up capital) are embedded in futures prices and why distant contracts typically show a wider basis
- Why the basis narrows toward zero as delivery approaches, what convergence means mechanistically, and how to spot exam traps that claim the basis widens into the delivery month or stays constant
- The distinction between outright price risk and basis risk, and what a hedger actually swaps when entering a futures position
Read the full lesson, free
This video's complete written lesson is free to read in the CertFuel app, no signup wall. The complete Series 3 course also includes adaptive practice questions and spaced-repetition flashcards, free through the end of 2026.