Basis (fair value)

Trader's Glossary · Contracts and markets

Definition. The difference between a futures price and the cash index value. It comes mainly from the cost of carry and dividends up to expiration.

How it works

A contract's theoretical fair value takes into account interest rates and the expected dividends of the index companies. The closer to expiration, the smaller the difference, and on settlement day the prices converge.

Example

A few months before expiration, Dow futures trade several hundred points above the cash index. The difference shrinks week by week.

What to watch out for

Because of the basis, levels from the cash index chart and from the futures contract aren't identical. When rolling, the next contract has a different price.

See also

Rollover, Continuous contract, Arbitrage.

More in Hetman Capital Club

You'll find the full explanation with graphics, examples and exercises in the 🖥️ Order flow atlas space, and its use in the live market in the 🔴 Live Room. Both are available to Club members (in Polish).

Educational content, not investment advice.