Basis Trading

Core idea

Basis trading focuses on the difference between a cash instrument and its derivative or between related maturities. Positions are sized to isolate the basis while controlling duration, beta, or contract-value differences.

Implementation

Profitability depends on financing, carry, roll, delivery terms, and the hedge ratio used.

Primary risk

Basis can widen under funding stress, forcing losses or deleveraging before expected convergence.

Frequently asked questions

What is basis trading?

Basis trading focuses on the difference between a cash instrument and its derivative or between related maturities. Positions are sized to isolate the basis while controlling duration, beta, or contract-value differences.

What is the main risk of basis trading?

Basis can widen under funding stress, forcing losses or deleveraging before expected convergence.