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Premium, Discount and Basis

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Definition of 'Premium, Discount and Basis'

The Basis is the difference between the spot or cash price of an index or commodity and the futures price of the nearest expiring contract on the commodity or index.

If the spot (cash) price is trading higher than the futures price then this is called a premium. If it is trading lower then it is called a discount.

The difference between the spot price and the futures price arises from a factor called the cost-of-carry. i.e. the holder of the commodity or asset will need to "carry" or own that asset for the period until it is delivered on the futures expiration date. This cost is the interest that could otherwise have been earned from the capital used to own the asset.

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