Premium, Discount and Basis
Definition of 'Premium, Discount and Basis'
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.
Do you have a trading or investing definition for our dictionary? Click the Create Definition link to add your own definition. You will earn 150 bonus reputation points for each definition that is accepted.
Is this definition wrong? Let us know by posting to the forum and we will correct it.