A person or firm is said to be short the basis if he sells the commodity in the cash market and places a long hedge position by buying in the futures market. This is common in the commodity market, in particular for precious metals. The commodity holder protects him-self against a price increase in the cash market by purchasing futures contracts on the commodity owned.
If the commodity price in the futures market moves up or down by the same amount as that of the cash commodity, the cost of hedging is the dealer’s commission. The hedger profits when the basis is negative (weakening). If the cash price falls by a greater amount than futures, the hedger makes a profit.
If the commodity price in the futures market moves up or down by the same amount as that of the cash commodity, the cost of hedging is the dealer’s commission. The hedger profits when the basis is negative (weakening). If the cash price falls by a greater amount than futures, the hedger makes a profit.
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| Short the Basis |
