Daffodil International University
Faculties and Departments => Business & Entrepreneurship => Business Administration => Topic started by: munna99185 on June 04, 2015, 03:34:10 PM
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(1) Positive and Negative Basis: Basis can be either positive or negative. Using our first formula, when futures price is higher than spot price, it is known as a Positive Basis and when futures price is lower than spot price, it is known as a negative Basis.
(2) Normal and Inverted Basis: Basis could either become more and more positive or negative as expiration month increases. When basis becomes more and more positive with longer expiration, it is known as a "Normal Market". Normal markets normally occur in commodities markets where cost of storage becomes higher with longer expiration. When basis becomes more and more negative with longer expiration, it is known as an "Inverted Market". Inverted markets normally occur in the index futures market where more and more interest is foregone with longer expiration.
(3) Changes in Basis: Basis is volatile and tends to change with changes in the spot price due to the dynamics of futures traders. As such, basis tends to widen (known as "Strengthening of the Basis") or shrink (known as "Weakening of the Basis") throughout the trading day and result in "Basis Risk" for futures traders speculating in basis itself.
Sayed Farrukh Ahmed
Assistant Professor
Faculty of Business & Economics
Daffodil International University