SHORT-THE-BASIS

When a person or firm needs to buy a commodity in the future, he can protect himself against price increases by making a substitute purchase in the futures market. The risk this person now faces is the risk of a change in basis (cash price - futures price). This hedger is said to be short-the-basis because he will profit if the basis becomes more negative (weaker); for example, if a hedger buys a corn futures contract at 325› when cash corn is 312›, the basis is -.13. If this hedge is lifted with futures at 320› and cash at 300›, the basis is -.20, and the hedger has profited by the $.07 decrease in basis.