The reason(s)for the basis is/are:

A) in the spot market, the buyer pays immediately, whereas in the futures market, this payment occurs at the expiry of the contract
B) in the spot market, the ownership of the asset is transferred immediately to the purchaser, which is not the case with the purchase of futures contracts
C) the buyer of an underlying asset faces carrying costs immediately, as opposed to the holder of a futures contract of such an asset
D) all of these choices

Question

The reason(s)for the basis is/are:

A) in the spot market, the buyer pays immediately, whereas in the futures market, this payment occurs at the expiry of the contract
B) in the spot market, the ownership of the asset is transferred immediately to the purchaser, which is not the case with the purchase of futures contracts
C) the buyer of an underlying asset faces carrying costs immediately, as opposed to the holder of a futures contract of such an asset
D) all of these choices

Quizplus · Accepted Answer

The basis arises due to three reasons.First,in the spot market,the buyer pays for the asset immediately whereas,in the futures market,the buyer delays payment until expiry.Hence,in the futures market,the buyer has the advantage of investing the purchase price and earning a return over the life of the futures contract.This feature tends to increase the futures price relative to the spot price.Second,a purchase in the spot market gives immediate ownership,and any dividends and interest payments made to the asset accrue directly to the purchaser.However,in the futures market,ownership of the asset is not transferred until payment at settlement.Consequently,the buyer of a futures contract has no right to dividends or interest payments made to the asset over the life of the futures contract.This feature tends to decrease the futures price relative to the spot price.Third,for some assets there are storage and transportation costs.Typical examples include commodity futures contracts such as wool,which are settled by physical delivery.The buyer of the underlying asset in the spot market faces these costs of carrying the asset over the life of the futures contract,whereas the buyer of the futures contract delays the carrying costs.

The Reason(s)for the Basis Is/are