Basis is a common concept in futures trading, which generally refers to the difference between the spot price of a specific commodity at a specific time and place and the futures price of the commodity in the futures market, that is, basis = spot price-futures price.
Since both the futures price and the spot price will fluctuate, the basis will also fluctuate during the validity period of the futures contract. The uncertainty of basis is called basis risk. The key to reduce basis risk and realize hedging is to choose a highly matched hedging futures contract. The basis risk is directly related to the basis at the time of hedging liquidation. When investors hold short positions in spot and futures, the basis of hedging liquidation day will be enlarged and investors will make a profit. On the contrary, when an investor will buy an asset in the future and hold a long future positions for hedging, and the basis on the hedging settlement date will expand, the investor will lose money.
For example:
On March 26th, the spot price of soybean meal per ton 1980 yuan. A feed enterprise decided to hedge soybean meal in Dalian Commodity Exchange in order to avoid the possible spot price increase in the future and thus increase the cost of raw materials. At this time, the August contract price of soybean meal futures was per ton 1.920 yuan, and the basis was 60 yuan/ton, so the company bought soybean meal August contract 10 lot in the futures market. On June 2nd, I bought 100 tons of soybean meal at the price of 2 10 yuan per ton in the spot market, and sold the June soybean meal contract10 lot at the price of 2040 yuan per ton in the futures market to hedge long positions. Judging from the basis, the basis has expanded from 60 yuan/ton on March 26th to 70 yuan/ton on June 2nd.
Transaction: March 26th spot market: spot price of soybean meal 1980 yuan/ton; Futures market: Buy August soybean meal 10 contract at the price of 1920 yuan/ton. The base price is 60 yuan/ton. Spot market on June 2: the price of buying 100 tons of soybean meal is 2 1 10 yuan/ton; Futures market: soybean meal contract sold in August 10 lot: the price is 2040 yuan/ton. The base price is 70 yuan/ton.
Arbitrage results: spot market loss 130 yuan/ton, futures market profit 120 yuan/ton, * * * loss 10 yuan/ton.
Net loss:100×130-100×120 =1000 yuan.
Fundamental changes conducive to the sale of hedging;
1, the futures price fell, the spot price remained unchanged, and the basis became stronger. Hedging is over, and additional profits can be obtained at the same time.
2. Futures prices remain unchanged, spot prices rise and basis becomes stronger. Hedging is over, and additional profits can be obtained at the same time.
3. Futures prices fall, spot prices rise, and the basis becomes extremely strong. When hedging ends, you can get extra profits in both markets at the same time.
Both the futures price and the spot price have gone up, but the spot price has gone up more than the futures, and the basis has become stronger. By ending the hedging transaction, you can gain extra profits while maintaining the value.
5. Both the futures price and the spot price fell, but the futures price fell more than the spot price, and the basis became stronger. By ending the hedging transaction, you can gain extra profits while maintaining the value.
6. The spot price suddenly rises from below the futures price, and the basis becomes stronger. When the hedging transaction is over, additional profits can be obtained at the same time of hedging.
For more information about basis, you can download the straight flush futures link. Including the real-time basis data of various futures varieties can give you a more intuitive understanding of the basis.