It is the difference between the spot price of an asset and the futures price (of the asset underlying the contract). If the asset to be hedged is the same as the asset underlying the futures contract, the basis is said to be zero at the contract expiration. Before expiration, the basis may be either positive or negative.
The basis changes over time due to the fact that the spot price and the futures price usually don’t undergo the same change. An increasing basis is typically referred to as a “strengthening of the basis“, while a decreasing basis is usually termed a “weakening of the basis“. The basis is usually calculated with regard to the futures contract nearing expiration date. It may reflect differences in times to expiration, product types and grades, and delivery locations.
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