Futures, the basis and what moves it

A futures price is not the market’s guess about spot. It is spot plus what it costs to carry the goods to delivery. Build it from those components and the basis stops being a mystery and becomes a number you can explain, line by line.

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Six things you will be able to do

10 units, 59 minutes. Every one of them ends with something you can do.

01 Price a future from spotBuild it from financing and carry, and see why arbitrage rather than opinion holds it in place.
02 Take carry apartEvery component named separately, and the basis each one produces.
03 Quote the basis correctlyWhich convention your quote uses, because the sign flips depending on which way you subtract.
04 Explain a price that does not matchBack out the input that would account for the gap instead of calling it a forecast.
05 Read convergence to one priceNinety one days out, and the realised price a hedge actually locks.
06 Move the carry, then the gradeWatch the basis respond, and see the gap that carry alone does not close.

What changes after this course

You stop reading a futures price as a forecast and start reading it as a cost, with the component behind every move in the basis named.

A fair futures price computed from spot, financing and carry

The basis quoted, with the convention it uses stated

A quoted price that does not match explained by backing out the input

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