Introduction
While dealing in commodities there are mainly 2 types of Analysis namely Fundamental and Technical Analysis, today we will be focusing on Fundamental Analysis and in that we will try to understand the concept and importance of Basis Price Analysis.
Basis Meaning:
Basis is the difference between a Spot cash price and the futures price of a particular commodity on a given futures exchange. For a specific commodity basis is defined as:
Basis = Cash Price - Futures Price
Where, Cash Price is the spot / mandi price for a specific commodity at a given location and time and the Futures Price is the relevant exchange futures price for that commodity.
Basis helps us to determine the following:
- The best time to buy or sell
- When to use the futures market to hedge a purchase or sale
- The future month in to place the hedge
- When to accept the suppliers offer or the buyers bid
- When to place the resale bid
Trading Strategies
Explanation: We have to consider 2 main Sets of data i.e., the Futures Price and the Spot Market Price. From the two sets of prices we calculate the Basis (Spot - Future) and then develop a trading strategy in combination of Basis and the Spot Prices. Mainly 4 types of strategies are developed based on the movement of Basis and the Spot prices.
Conclusion
If a person understands this concept of Basis and applies it in their analysis it could act as a very prudent guiding tool for investment.
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