What is a Narrow Basis?
How Does a Narrow Basis Work?
For example, let's say the price of a bushel of wheat is $1 right now (this is called the). You could buy the wheat right now for $1, or you could buy a that gives you the right to purchase one bushel of wheat for $1.05 a from now. The higher price later suggests that sellers of one-year wheat contracts expects wheat to be slightly more scarce a from now, but the difference between the price now and the expected price later is only 5 cents, and this might be a very narrow basis by wheat standards.
Why Does a Narrow Basis Matter?
In general, the narrower the, the more efficient the for the security or . In turn, the for the security or is relatively and active. In the , a narrow basis also suggests that the expects the supply and demand for the to change very little between now and when the expires.