## WHAT IS 'Basis Quote'

Basis quote refers to a quote given on a futures contract expressed by the difference between that price and either another futures contract or the spot price of the underlying commodity.

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## BREAKING DOWN 'Basis Quote'

A basis quote is a method of expressing the price of a futures contract as the difference between that price and either another futures contract or the cash, or spot, price of the underlying commodity. Used on its own, basis refers to the spread between the delivery price detailed on a futures contract and the spot price of a given commodity. Basis can be determined by the following formula:

Basis = futures contract price - spot delivery price

If the spot price of a bushel of corn is \$3 on in January, and the price of a February futures contract on corn is \$3.25, the basis is \$0.25. If the price of the February contract were \$2.75, the basis would be expressed as a negative quantity, or -\$0.25.

A corn farmer seeking to hedge against the future downward movement in the spot price of corn might decide to offer a futures contract in January. The farmer, concerned that the price of corn would dip below \$3, might try to lock in a price of \$3.25 per bushel for February delivery. The basis quote for such a contract would be expressed as \$0.25 under, as the cash price would be under the contract price.

If the farmer is successful in selling that contract, they would then hold a short position and would be subject to basis risk. Typically, cash and future prices will move together and basis volatility will be relatively low. If, in our example above, the cash price increases above \$3.25 per bushel between January and February, the basis of the farmer’s February contract will narrow, and the farmer’s short position will lose value. As this happens, the basis quote on the farmer’s \$3.25 February contracts would reflect the tighter spread between the contract and the cash price. This would be offset by the cash price that the farmer can receive in February for sales outside of the contract. The farmer would, however, eventually be forced to either make delivery on that corn at \$3.25 per bushel, or to close out the short position on the open market.

Movements in basis are affected by many factors, including holding costs, weather events and geographic variations for contracts offered in different markets.

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