Narrow Basis

DEFINITION of 'Narrow Basis'

A condition found in futures markets in which the spot price of underlying commodities is close to the futures price of the same contract.

BREAKING DOWN 'Narrow Basis'

A narrow basis suggests that the market is efficient, as the supply of and demand for the underlying commodity are in equilibrium.

The spot price and futures price should converge at maturity of the futures contract. If they don't, there is an arbitrage opportunity.

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RELATED FAQS
  1. How are commodity spot prices different than futures prices?

    Find out more about commodity spot and futures prices, how to calculate a commodity's futures price, and the differences ... Read Answer >>
  2. Why do futures' prices converge upon spot prices during the delivery month?

    It's a fairly safe bet that as the delivery month of a futures contract approaches, the future's price will generally inch ... Read Answer >>
  3. How can I calculate the notional value of a futures contract?

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  4. What are some securities that have spot rates?

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  5. How do commodity spot prices indicate future price movements?

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