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Basis Risk

A

Adam

Member
Hi there,
On page 55 in Hull's book (9th), it is claimed that "From Table 2.2, we see that, on May 14, 2013, the basis was negative for gold and positive for short maturity contracts on corn and soybeans.".
Could anyone help explain how he reach this conclusion, please? I guess it is quite trivial but I just cannot see it.
Thank you!
Regards.
 
Here is my take on this:
For gold, the futures prices are increasing as the maturity increases. So, this seems to indicate that currently the spot price is more than the futures price and the expectation is that over-time the futures price will increase such that at maturity we have: spot price = futures price.

The opposite holds for soybeans and corn - the futures prices are decreasing as the maturity increases. So, the spot price is currently lower than the forward price with the expectation that the forward price will steadily decrease over time such that at maturity we have: spot price = futures price.

Hope this helps!
 
KaustavSen said:
Here is my take on this:
For gold, the futures prices are increasing as the maturity increases. So, this seems to indicate that currently the spot price is more than the futures price and the expectation is that over-time the futures price will increase such that at maturity we have: spot price = futures price.

The opposite holds for soybeans and corn - the futures prices are decreasing as the maturity increases. So, the spot price is currently lower than the forward price with the expectation that the forward price will steadily decrease over time such that at maturity we have: spot price = futures price.

Hope this helps!
Click to expand...
Thank you for your reply, KaustavSen. I think I get it now.
Just to add a few more words. The soon-to-mature future price (June 13) can be considered similar to spot price (1,429). Then if we enter a June 14 futures contract (with price 1,441), then we have spot price > future price. Hence, it is a positive basis.
Regards.
 
Xu Shi said:
Thank you for your reply, KaustavSen. I think I get it now.
Just to add a few more words. The soon-to-mature future price (June 13) can be considered similar to spot price (1,429). Then if we enter a June 14 futures contract (with price 1,441), then we have spot price > future price. Hence, it is a positive basis.
Regards.
Click to expand...

Thanks Xu Shi. Glad it helped you.

Agree with your numerical example.
 
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