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What is a basis only contract?

What is a basis only contract?

In a basis contract you establish a price on the spread between the cash and the futures market. A basis contract is done when the spread is normal or narrower than normal, or when one thinks the basis will widen into the time frame one wishes to sell. By establishing a basis contract you have in no way set the price.

When should a basis only contract be used?

Disadvantages of Basis Contract (If futures drop below the level used to calculate your advance, you may have to pay back a portion of the advance. 2. Required to deliver grain as stated in contract. 3.

Does a basis contract reduce risk?

Basis contracts involve down- side risk as well as upside price potential. Basis contracts are marketing instruments that establish the basis (the difference between the local cash price and futures price) used to determine the price paid for grain or soybeans at a later time.

What is an NPE contract?

NO PRICE ESTABLISHED (NPE, Delayed or Deferred Price Contract) FUTURES + BASIS – (FREIGHT & MARGIN) = CASH. For this type of contract, the seller delivers and transfers ownership of his grain to an elevator without setting a sales price. No futures or basis are established until the contract is priced.

How do you avoid basis risk?

The simplest way to mitigate your exposure to basis risk is to enter into supply (in the case of a consumer) or marketing (in the case of a producer) agreements that reference a “primary” index (i.e. NYMEX natural gas furtures, ICE Brent crude oil, etc) or one of the numerous, liquid (actively traded) regional indices …

Which of the following is a potential cause for basis risk?

Basis risk is the potential risk that arises from mismatches in a hedged position. Basis risk occurs when a hedge is imperfect, so that losses in an investment are not exactly offset by the hedge. Certain investments do not have good hedging instruments, making basis risk more of a concern than with others assets.

What is a corn basis?

Basis is the difference between the futures price and your local cash price. For example, corn basis in February is usually defined as the difference between the current cash price and the current March futures price.

What does Basis mean on grain prices?

Basis is the difference between the cash price paid for your grain and the nearby Chicago Board of Trade futures price. Basis is often called “the voice of the market” because it’s an indication of whether or not the market wants your grain.

Can a basis be negative?

Basis is deposits and earnings less withdrawals. Like a bank account, more cannot come out than goes in—basis can never go negative. Since basis begins when the company stock is acquired, basis should be tracked from day one.

Why is Basis important?

The basis of an asset is very important because it is used to calculate deductions for depreciation, casualties, and depletion, as well as gains or losses on the disposition of that asset. The basis is not always equal to the original purchase cost.

What does it cost to set a basis contract?

Basis contracts in most situations cost nothing to establish. If basis is narrower than normal you are in essence being offered a premium for your product so lock that premium in. Then watch the market to fix the futures price when it is acceptable. The combination of the two contracts will set a cash price.

What does basis mean in a futures contract?

Basis is defined as the cash price minus the futures price. In a basis contract you establish a price on the spread between the cash and the futures.

What does basis mean on a grain contract?

Basis If you feel there is a potential for future prices to improve, but basis levels may get worse, a Basis grain contract allows you to lock in only the basis portion of a cash contract for a specific delivery period. With the basis set, you can wait until a later date to set the futures reference pricing portion of your cash contract.

When to use basis contract in soybeans market?

A basis contract is done when the spread is normal or narrower than normal, or when one thinks the basis will widen into the time frame one wishes to sell. Normal basis on soybeans at 54 car rail markets in Eastern South Dakota is 50-55 under the futures.