Basis is the price difference between a cash or spot market and a futures contract used to represent or hedge that exposure. In physical commodity markets, the common convention is basis = cash price − futures price: a positive basis means cash trades over futures, while a negative basis means cash trades under futures. The sign and construction are not universal across futures markets. Equity-index basis, for example, may be quoted as futures minus spot, while U.S. Treasury futures basis compares a cash security with a conversion-factor-adjusted futures price. A basis number therefore has little meaning unless the referenced cash instrument, futures contract and calculation convention are clear.
What makes the spread move
A futures hedge fixes the futures leg of a price relationship, not the eventual basis. For a local commodity market, basis can reflect freight, storage, handling, quality, deliverability and local supply-demand conditions. In financial futures, financing costs, income such as dividends, interest-rate relationships and contract-specific mechanics can dominate instead. Basis can strengthen or weaken even when cash and futures prices move in the same direction, because what matters is their relative movement.
Convergence is market-specific
For physically delivered futures, convergence links the expiring futures price to the cash value of commodities that can satisfy the contract under its delivery terms. That does not imply that every local cash quote must reach zero basis. A cash market at another location, for another grade or with different transport economics can retain a differential even as the relevant deliverable market converges. An apparent failure of local basis to reach zero may therefore reflect the fact that the cash price being compared is not the contract's deliverable economic equivalent.
Basis is an observation; basis risk is the uncertainty that this spread changes unfavorably between hedge initiation and completion. Research also needs a consistent construction. Switching the referenced futures month can change the measured basis even if the cash price is unchanged, so historical analysis should define the cash location and quality, futures month or roll rule, units and timestamp. Without those choices, two valid-looking basis series can describe materially different exposures.