Long The Basis

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DEFINITION of 'Long The Basis'

An individual or company that owns or has purchased a commodity such as oil, gold or lumber and then hedges its position by selling futures contracts on the commodity owned. This gives commodity holders a guaranteed price that they can sell their commodities at if the market price moves against their underlying position.

BREAKING DOWN 'Long The Basis'

By definition, a gold-mining company maintains a significant position in the precious metal. However, because the price of gold is susceptible to market pressures and may fluctuate wildly at times, the company may choose to hedge its position (through the sale of futures contracts) and thus lock in a guaranteed range of value. An individual or company that does this (owns the physical commodity and hedges their position) is said to be "long the basis".

RELATED TERMS
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    Making an investment to reduce the risk of adverse price movements ...
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    A financial contract obligating the buyer to purchase an asset ...
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    A securities position that is not hedged from market risk. Both ...
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RELATED FAQS
  1. What is the difference between hedging and speculation?

    Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the underlying ... Read Full Answer >>
  2. What is a basis point (BPS)?

    A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial ... Read Full Answer >>
  3. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between ... Read Full Answer >>
  4. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  5. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  6. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>

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