Does anyone in the forum has a thread /or an example to determine if the basis before delier is positive or negatie.
In addition, in what condition does this occur?
Thank you
What is your q?
I read the below from one of the documents downloaded from web and it was too much for me to digest.
I suspected that this could be potential question, but probably in a more simple terms.
Hence I posted the question.
e) convergence of spot and futures prices on the delivery date
the possibility of physical delivery of the underlying asset guarantees convergence of futures and spot prices on the delivery date
basis = spot price − futures price = S – F
[beware of the alternative convention B = F – S that is also used!]
- basis is significantly negative just prior to the delivery date (F = 100, S = 80)
Ö selling futures contract (+100), buying the good in the spot market and making delivery to the buyer of the futures contract (–80)
- basis is significantly positive just prior to the delivery date (F = 80, S = 100)
Ö buying futures contract and taking delivery (–80), selling the good in the spot market (+100)
selling the good short (+100), buying futures contract (–80) and giving the good back
no arbitrage condition requires the base to be zero on the delivery date otherwise substantial arbitrage profits can be made