Basis Differential
Let's start with a couple of basic definitions:
Spot price: the present price at which an asset (currency, other securities, etc.) can be immediately purchased or sold.
Futures contract: an agreement (legally binding, of course) to either sell or buy an asset at a designated future time and price.
Futures price: the price specified in a futures contract.
Now the important one: basis differential is the difference between the spot price of an asset and futures price specified on the contract. The difference between Flying High Medicines LLC's spot price and the agreed upon futures price for their medical supply contract will be the basis differential.
Related or Semi-related Video
Finance: What Is a Basis Point?124 Views
finance a la shmoop what is a basis point?
well one percentage point is a hundred basis points, half a percentage is 50
basis points, five percentage points is? yeah we're gonna make you do that one on [frowning man talks to camera]
your own. well the basic idea is that in very large financial transactions those
involved need highly granular computation grids, and basis points
divid interest rates much more tightly. if a company borrows three billion
dollars just noting that the rate is four percent is really vague. it would
need to be noted as four point zero zero percent. why? because just one basis point [equation on screen]
i.e. one hundredth of a percent per year on three billion dollars borrowed
is still a lot of money. that is one basis point on three billion bucks is
300 grand .so basis points are a real thing in high finance transactions and [smiling man talk to camera]
okay okay the answer is 500 basis points. yeah all right now you can go back to
spinning this thingy. [man spins fidget spinner]
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