The basis (B_t,T)at time t between the spot price (S_t)and a futures contract expiring at time T (F_t,T)is A) B_t,T = St+ F_t,T B) B_t,T = S_t- F_t,T C) B_t,T= S_t × F_t,T D) B_t,T = S_t/F_t,T E) None of the above

Question

Quizplus · Accepted Answer

The basis is the difference between the spot price and the futures price, so the correct formula is B_t,T = S_t- F_t,T. Choice A adds the two prices together, which doesn't make sense. Choice C multiplies the two prices together, which also doesn't make sense. Choice D divides the spot price by the futures price, which is similar to calculating the price ratio, but not the basis. Therefore, the answer is B.

The Basis (Bt,T)at Time T Between the Spot Price (St)and

The Basis (B_t,T)at Time T Between the Spot Price (S_t)and