Identifier: C3T3L4 · Revision: 2026-10-26 · Classification: domestic

Decision and objectives

Measure basis using an explicit sign convention. The decision record must connect the exposure, cash dates and implementable contract, rather than stop at a favorable price forecast.

By the end, you can measure basis using an explicit sign convention; separate roll execution cash from subsequent hedge profit; explain basis convergence limits and remaining funding costs.

Prerequisite: C3T3L3; completed Classes 1 and 2 and the Stock Market School foundation or Forex School foundation. All cases below are hypothetical; their prices, costs, rates, dates, contractual assumptions and collateral amounts are teaching inputs, not current offers.

Mechanics

Define basis here as spot minus futures. A cash-and-futures hedge locks neither each individual price nor every funding cost. As expiry approaches, convergence depends on the settlement asset and reference; a business's actual purchase price can retain quality, location, time and dealer differences. Different maturities are different contracts, so rolling requires closing one and opening another.

Price and return drivers

For a long cash asset and short future, change in combined gross value per unit = change in spot − change in futures = ending basis − starting basis. A negative or positive roll price gap is not an immediate cash payment of the whole notional difference in a futures-only roll. Its economic effect appears through the new contract's future path, plus realized close and opening costs.

Worked case

Hypothetical spot 100 and futures 104 give basis −4. Later spot 110 and futures 112 give basis −2. Holding 1,000 cash units and shorting matched 1,000 futures units yields +TRY 10,000 spot and −TRY 8,000 futures, combined +TRY 2,000. Execution TRY 300, inventory funding TRY 1,000 and collateral funding TRY 200 leave TRY 500 before tax. The spot gain is not cash until the asset is sold; the futures loss already requires settlement cash.

Adverse case

Instead, spot 110 and futures 116 give basis −6, making the combined gross result −TRY 2,000 and net −TRY 3,500 after the same costs. A roll closes a near short at 112 and opens a far short at 118: the six-point gap is the deferred basis, not TRY 6,000 cash income on 1,000 units. If the far later settles 120, that new short loses TRY 2,000; near-leg results must be added from their own entry.

Practical use

Use synchronized spot and futures observations and executable bid/ask sides. Track each expiry separately, preserve the roll fills and reconcile daily settlement before joining returns. Include two-leg commissions, spread, inventory and collateral funding, tax and settlement dates. Avoid continuous-price charts that silently splice maturities without explaining adjustment.

Reconcile the confirmation, position register and cash statement separately. Costs include the quoted bid/ask spread, brokerage and clearing charges, collateral or principal financing, currency conversion, custody where relevant, and exit or termination charges. A mark is not a fill. Any amount explicitly excluded below remains outside the reported result. Tax is excluded from these teaching cases: an actual comparison requires income year, investor residence and individual/corporate status, contract and acquisition dates, settlement form and effective law. The GIB guide, checked 2026-10-26, covers 2025 individual investment income, so its publication date alone does not settle a 2026 derivative liability.

Decision boundaries

Basis risk remains whenever the exposure and settlement reference are imperfectly matched or closed before expiry. A narrow starting basis does not ensure cheap funding or a timely exit. Retain some exposure or choose another hedge if the expected basis risk and funding cost exceed the risk reduction.

Practice and references

Exercise: matched 500-unit cash-long/futures-short hedge starts at spot 80 and futures 83; ends at spot 75 and futures 77. Solution: basis moves −3 to −2, gross gain 500 × 1 = TRY 500. With TRY 150 execution and TRY 300 funding, net is TRY 50 before tax. Cash asset loss TRY 2,500 and futures gain TRY 3,000 reconcile independently.

Takeaway: Explain basis convergence limits and remaining funding costs using the actual cash schedule, with every excluded cost and remaining exposure stated.

Reference card: viop-future. Formula: Basis hedge gross result. Glossary: Basis, Roll. Next lesson: C3T4L1. Topic test.

Sources and verification date (2026-10-26):

Shared reference guide | Class examination