Basis (Futures)
The price difference between the spot (cash) price of an underlying and its corresponding futures price.
Basis = Spot Price − Futures Price
Basis in futures is defined as: Basis = Spot Price − Futures Price (though some markets use Futures − Spot). A positive basis means the spot price is above the futures price (backwardation); a negative basis means futures are above spot (contango / normal carry).
For equity index futures, basis is closely related to fair value — it reflects dividends expected before expiry minus the cost of carry (risk-free rate). As expiry approaches, basis converges to zero (basis convergence), which is why cash and futures prices align at settlement.
Basis risk arises when a hedger's physical position and the hedging futures contract do not move in perfect tandem — the hedge is imperfect by the amount the basis changes.