Futures basis is the difference between a futures price and the spot price of the underlying asset, measured using a stated convention and observation time. A cash-and-carry trade typically buys the spot asset and sells a corresponding dated futures contract to seek the price difference after financing, execution, and other costs.
Define the basis before comparing markets
A common convention defines basis as futures price minus spot price. Under that convention, a positive basis means futures trade above spot, while a negative basis means futures trade below spot. Some data providers reverse the subtraction or express the result as a percentage. A chart’s sign therefore has meaning only after its formula and units are known.
Percentage basis commonly divides that price difference by the spot price. Comparisons also require matching the underlying asset, quote currency, and observation time. A stale spot quote paired with a fresh futures quote can create an apparent opportunity that never existed simultaneously. Differences between a settlement index and the spot market being traded can also matter.
Why dated futures can differ from spot
A dated futures contract provides exposure with a specified settlement date rather than immediate ownership. Financing costs, demand for leveraged exposure, constraints on arbitrage capital, and the practical difficulty of holding or borrowing an asset can affect its relationship to spot. A premium is a market price relationship, not a promise that spot will rise toward the futures quote.
Settlement rules create an important boundary. A cash-settled future is resolved using a defined settlement reference; a physically delivered contract has its own delivery requirements. Near settlement, arbitrage incentives can encourage alignment with the relevant reference, but the trader’s spot execution price may differ from it. Reading the actual contract specification is essential to understanding what ultimately settles.
The basic cash-and-carry structure
The standard positive-basis structure combines a long spot position with a short dated futures position. If quantities and exposure match, a rise in the asset tends to benefit the spot leg while hurting the futures leg; a fall tends to do the reverse. The intended return comes from the initial price difference, after costs, rather than a directional forecast.
This description is simplest for a linear contract whose exposure can be matched directly to the spot quantity. Inverse contracts, different collateral currencies, and contract multipliers can change the hedge arithmetic. A matching contract count does not necessarily mean matching economic exposure. The hedge must be derived from the instrument’s payoff rather than its product name.
A clearly hypothetical worked example
Assume, as a hypothetical example only, one unit of an asset costs 100 quote units and a matching dated future can be sold at 104. Suppose the contract settles at 110 and the spot unit can also be sold at 110. The spot gain is 10, the futures loss is 6, and the combined gross gain is 4 quote units.
If the hypothetical settlement and spot exit were instead both 90, the spot loss would be 10 and the futures gain would be 14, again producing a gross gain of 4. This simplified result assumes equal exposures, simultaneous entry, matching exit references, and no liquidation or default. It excludes every fee, financing charge, custody cost, and operational expense.
Gross basis is different from net return
A useful accounting expression is net result equals the combined profit or loss on both legs minus execution fees, spread costs, financing, custody, transfers, and other applicable expenses. Each cost needs its own unit and time period. A percentage calculated against spot notional is different from a return calculated against the trader’s total committed capital, including margin and reserves.
Annualization introduces another assumption. One simple convention multiplies percentage basis by the number of days in a chosen year convention and divides by days to settlement. This converts a short-period price difference into a comparison metric; it does not show a return already earned. It also does not establish that the same opportunity can be repeated throughout a year.
Margin can break an apparently balanced trade
The spot and futures legs may offset economically while remaining separate operationally. If the asset rises, the short futures leg can require additional collateral even as the spot holding appreciates. That spot gain may not be available as eligible margin, particularly when the legs sit on different platforms. A forced close can interrupt the strategy before its intended settlement.
Collateral introduces further exposure. Its value may change, its eligibility may be reduced, or withdrawal access may become constrained. Cross-margin arrangements can connect the trade to unrelated positions. A hedge calculation therefore does not replace a liquidity calculation: potential interim margin requirements, collateral movements, and settlement timing deserve separate analysis from the final combined payoff.
Execution and settlement mismatches
Two-leg entry is rarely perfectly simultaneous. If spot fills first and futures do not, the position temporarily carries directional exposure. Partial fills can create a similar mismatch. Closing early adds uncertainty because the remaining basis may widen or narrow before both legs can be exited. The initial spread is not automatically captured by an early unwind.
At expiry, an index-based futures settlement may differ from the price obtainable when selling the actual spot holding. Trading suspensions, withdrawal delays, transfer requirements, and account restrictions can complicate completion. These are concrete reasons to distinguish an ideal payoff diagram from an executable process. A theoretically offsetting position still depends on market access and contractual performance.
Dated futures and perpetual funding differ
A perpetual contract has no ordinary scheduled expiry that closes the basis through settlement. A spot-long, perpetual-short combination generally has exposure to recurring funding transfers, whose direction and size can change under the contract’s rules. A favorable current funding rate does not lock in the total income that might accrue over a future holding period.
For context, live data can help illustrate the funding observations available at a particular moment. Those observations concern perpetual funding rather than a guaranteed dated-futures convergence return. Comparing the two requires accounting for different cash flows, holding periods, collateral needs, and exit conditions instead of treating their displayed percentages as interchangeable yields.
What the strategy does and does not establish
Cash-and-carry explains how opposing exposures can isolate part of a price relationship. It does not eliminate counterparty failure, custody loss, funding uncertainty, or operational mistakes. Reverse cash-and-carry, involving a spot short and a long future, adds asset-borrow availability and recall considerations. Neither structure should be described as risk-free simply because its idealized directional exposure is small.
Key takeaways
- Specify the basis formula, units, contract, and observation time.
- Separate gross price differences from costs and committed capital.
- A matched payoff can still face interim margin and execution risk.
- Perpetual funding is a different cash flow from dated-futures basis.
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