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.

INVESTOPEDIA EXPLAINS '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".

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RELATED FAQS
  1. 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 >>
  2. 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 >>
  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. What are the primary sources of market risk?

    Market risk is the risk of loss due to the factors that affect an entire market or asset class. Market risk is also known ... Read Full Answer >>
  5. How do I learn technical skills for trading commodities?

    Many resources are available for those seeking to learn to trade commodities, also known as futures, directly from the major ... Read Full Answer >>
  6. How can an investor make money from a decline in the electronics sector?

    Speculation methods, such as short selling, futures contracts and put options, offer investors a way to make money from a ... Read Full Answer >>
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