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?

    Learn how the notional value of a futures contract is calculated, and how futures are different from stock since they have ... Read Answer >>
  4. What are some securities that have spot rates?

    Learn about the types of assets that have spot rates, and understand how the spot rate is used to determine the fair market ... Read Answer >>
  5. How do commodity spot prices indicate future price movements?

    Find out more about commodity spot and futures prices, how to calculate commodity futures prices and how spot prices indicate ... Read Answer >>
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    Learn what items futures may be purchased for, what a futures contract is and discover how the futures markets have greatly ... Read Answer >>
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