The Forward Payoff

Basis, Contango & Backwardation

Basis names the gap between spot and forward prices.

highlighted = computed this step

Spot minus forward

Basis is spot minus forward. Here spot is $100.00 and the forward is $105.00, so basis is negative $5.00.

basis=S−F=$100.00−$105.00=−$5.00\text{basis}=S-F=\$100.00-\$105.00=-\$5.00

Carry language

Because the forward is above spot, this example is contango. If the forward were below spot, that would be backwardation.

F>S⇒contango,F<S⇒backwardationF>S\Rightarrow\text{contango},\quad F<S\Rightarrow\text{backwardation}

Market note

Basis language describes a price relationship, not a forecast or trading recommendation. Real markets can include storage, funding, margin, and delivery details.

basis is descriptive, not a forecast\text{basis is descriptive, not a forecast}