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| Office for Futures and Options Research | ||
| DEPARTMENT OF AGRICULTURAL & CONSUMER ECONOMICS | ||
Basis is defined as the difference between the cash price and the futures price, Basis = Cash Price - Futures Price.
| 1) When the basis is charted for a particular contract expiration the convergence pattern is revealed. |
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2) Convergence is the tendency of the cash and futures prices to "come together" at the delivery location in the delivery period, for example the March 2005 Corn basis at Chicago terminals. |
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| 3) Typically, when the basis is plotted over time, with a series of expirations, the rollover from one futures contract to the next is not taken into account. This results in a basis chart that looks like "noise" when the basis for one expiration is juxtaposed to the basis for the next expiration. |
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4) The customary basis chart does show the relative risk reduction from hedging, especially when compared to the underlying cash price chart. |
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| 5) However, when the spreads are taken into account at the time of rollover the basis chart which incorporates spreads is dramatically different. The basis chart now shows how basis follows spreads and is useful for making merchandizing decisions. |
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6) Chicago terminal corn basis with spreads. |
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