Calculate basis (futures minus spot) and compare to theoretical pricing based on cost of carry.
Market Data Inputs
Enter current market prices to analyze the basis structure
Formula Used
Basis = Spot Price - Futures Price
The basis represents the difference between the cash price of a commodity or financial instrument and its related futures contract price. It is the primary measure of the relationship between the two markets.
Futures Basis (or simply "the basis") is the numerical difference between the current spot price of a specific asset and the price of a futures contract for that same asset. It serves as a barometer for the relationship between the physical market (immediate delivery) and the derivatives market (future delivery).
The standard formula used in most commodity markets is:
Basis = Spot Price - Futures Price
However, in some financial markets (like stock index futures), the convention is sometimes reversed (Futures - Spot). This guide follows the standard commodity definition (Spot - Futures), where a positive basis implies the spot price is higher than the futures price.
Market Structures: Contango vs. Backwardation
The polarity of the basis defines the market structure, which tells traders a great deal about supply, demand, and storage costs.
1. Contango (Negative Basis)
A market is in Contango when the Futures Price is higher than the Spot Price (Basis < 0). This is considered the "normal" state for storable non-perishable commodities (like gold, oil, or corn) because of the Cost of Carry.
Why it happens: Sellers demand a higher price in the future to compensate for storage costs, insurance, and the interest on tied-up capital.
Implication: There is no immediate shortage of the commodity. Market participants are willing to pay more for delivery later.
2. Backwardation (Positive Basis)
A market is in Backwardation when the Spot Price is higher than the Futures Price (Basis > 0).
Why it happens: Buyers are desperate for immediate delivery and are willing to pay a premium (spot) over the future price. This premium is often called the "convenience yield."
Implication: Signals a supply shortage or bottleneck. It incentivizes holders of physical inventory to sell now rather than store it.
Key Drivers of Basis
The basis is not static; it fluctuates constantly due to several factors:
Cost of Carry
Storage, interest rates, and insurance costs push futures prices up relative to spot (strengthening contango).
Convenience Yield
The benefit of physically holding the asset to keep production running. High convenience yield pushes spot prices up (strengthening backwardation).
Supply & Demand Shocks
Local supply disruptions (e.g., a pipeline break) can spike local spot prices without affecting global futures prices as much.
Time to Expiry
As the contract nears expiration, the uncertainty and carrying costs diminish, forcing the basis to zero.
The Principle of Convergence
One of the few certainties in futures trading is Convergence. As a futures contract approaches its delivery date, the futures price and the spot price must converge.
Why? Arbitrage. If the futures price were significantly higher than the spot price on delivery day, a trader could buy the spot asset, sell the futures contract, and immediately deliver the asset for a risk-free profit. This arbitrage pressure forces the prices together.
Hedging and Basis Risk
For hedgers (farmers, miners, airlines), Basis Risk is the risk that the basis will change unpredictably between the time a hedge is placed and when it is lifted.
A perfect hedge assumes the basis remains constant or converges predictably. However, if the basis moves against the hedger ("Widening" or "Narrowing" unexpectedly), the hedge may not fully offset the price risk.
Short Hedger (Seller): Benefits if the basis strengthens (Spot rises relative to Futures).
Long Hedger (Buyer): Benefits if the basis weakens (Spot falls relative to Futures).
Frequently Asked Questions
Common questions about Basis, Contango, and Backwardation
What is a "Strong Basis" vs. "Weak Basis"?
A "Strong Basis" means the spot price is high relative to the futures price (more positive or less negative). A "Weak Basis" means the spot price is low relative to the futures price. Producers (sellers) typically prefer a strong basis, while consumers (buyers) prefer a weak basis.
Can the basis be zero?
Yes. The basis typically typically approaches zero as the futures contract reaches its expiration date. This phenomenon is known as convergence. At delivery, the futures instrument effectively becomes the spot instrument.
How does interest rate affect basis?
For financial futures (like S&P 500 futures), interest rates are the primary component of the "Cost of Carry." Higher interest rates increase the theoretical futures price relative to spot, leading to a more negative basis (Contango) defined as Spot - Futures.
Is Contango bullish or bearish?
Contango (Futures > Spot) is often a bearish signal for the spot price, as it suggests there is ample supply available now. However, it can also simply reflect high storage costs. For long-term investors using futures (like ETFs), Contango is detrimental because of the negative "roll yield."
Is Backwardation bullish or bearish?
Backwardation (Spot > Futures) is typically a bullish signal for the physical commodity. It implies a supply deficit or strong immediate demand. Investors rolling long futures positions in a backwardated market earn a positive "roll yield."
What is "Basis Risk"?
Basis risk is the danger that the futures price and spot price will not move in perfect correlation. For a hedger, this means their gains on the futures contract might not perfectly offset their losses in the cash market, or vice versa.
How do I calculate the Basis for Grain?
In grain markets (Corn, Soybeans, Wheat), Basis is universally calculated as Local Cash Price minus the Futures Price of the nearby contract. If Local Cash Corn is $4.50 and Futures is $4.80, the Basis is "-30 cents" or "30 under."
What is Arbitrage in relation to Basis?
Cash-and-carry arbitrage exploits a basis that is "too negative" (futures overpriced relative to spot + carry costs). A trader buys spot, sells futures, stores the asset, and delivers it at expiry for a risk-free profit.
Why is the basis different for different locations?
This is called "Locational Basis." Transportation costs create price differences between regional spot markets. A glut of oil in Cushing, OK might depress spot prices there (weak basis) while spot prices in Houston remain high (strong basis).
Does negative basis always mean Contango?
Using the standard formula (Spot - Futures), yes, a negative result means Futures > Spot, which is Contango. If you use the reverse formula (Futures - Spot), a positive result is Contango. Always check the sign convention being used in your specific market.
Usage of this Calculator
Applications in trading and hedging
Producers (Short Hedgers)
Farmers or Miners use this to decide when to lock in prices. A "Strong" basis is a signal to sell the cash commodity now rather than store it.
Consumers (Long Hedgers)
Airlines or Manufacturers look for a "Weak" basis to buy physical inventory cheap relative to futures.
Arbitrageurs
Exploit "Cash-and-Carry" opportunities when the basis is sufficiently negative (Contango) to cover storage and interest costs.
Market Analysts
Monitor market structure (Contango/Backwardation) to gauge immediate supply tightness vs. long-term expectations.
Summary
The Futures Basis Calculator is a diagnostic tool for the health of a commodity or financial market.
Basis > 0 (Positive)Backwardation. Spot is expensive. Supply shortage.
Basis < 0 (Negative)Contango. Futures are expensive. Cost of carry dominates.
ConvergenceBasis must equal 0 at expiration.
Embed This Calculator
Add this calculator to your website or blog using the embed code below:
<div style="max-width: 600px; margin: 0 auto;">
<iframe
src="https://mycalculating.com/category/finance/futures-basis-calculator?embed=true"
width="100%"
height="600"
style="border:1px solid #ccc; border-radius:8px;"
loading="lazy"
title="Futures Basis Calculator Calculator by MyCalculating.com"
></iframe>
<p style="text-align:center; font-size:12px; margin-top:4px;">
<a href="https://mycalculating.com/category/finance/futures-basis-calculator" target="_blank" rel="noopener">
Use full version on <strong>MyCalculating.com</strong>
</a>
</p>
</div>
Calculate basis (futures minus spot) and compare to theoretical pricing based on cost of carry.
How to use Futures Basis Calculator
Step-by-step guide to using the Futures Basis Calculator:
Enter your values. Input the required values in the calculator form
Calculate. The calculator will automatically compute and display your results
Review results. Review the calculated results and any additional information provided
Frequently asked questions
How do I use the Futures Basis Calculator?
Simply enter your values in the input fields and the calculator will automatically compute the results. The Futures Basis Calculator is designed to be user-friendly and provide instant calculations.
Is the Futures Basis Calculator free to use?
Yes, the Futures Basis Calculator is completely free to use. No registration or payment is required.
Can I use this calculator on mobile devices?
Yes, the Futures Basis Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.
Are the results from Futures Basis Calculator accurate?
Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.