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Basis
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Basis of a Forward or Futures Contract (1) The difference between the forward price or yield and the spot price or yield of an instrument such as a futures contract or the forward component implicit in an options contract. Alternately expressed as the cost minus the benefits of holding the hedged spot underlying until the forward or futures settlement date. See Fair Value Basis, Carrying Charge Market, Hedge (1), Intrinsic Value of an Option, Call Option (diagrams). See also Long the Basis, Premium (7), Forward Intrinsic Value. (2) The uncertain relationship between price or rate in two or more related but not identical markets. In a cross hedge, this uncertain relationship creates basis risk. See Basis Risk (3). (3) A convention for interest rate calculation. See Bond Basis, Money Market Basis. (4) A bond investor's yield-to-maturity. (5) The cost used to determine taxable capital gain or loss on an investment.
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