Basis trading (cash-and-carry)

Definition

Basis trading holds a futures contract against its underlying cash instrument — long the cheap side, short the rich side — to capture the convergence of futures to spot at expiry. The classic cash-and-carry: buy the asset, sell the futures above fair carry-adjusted value, deliver (or unwind) at convergence. The basis (spot minus futures) is the traded quantity; direction in the underlying is hedged out.

How it works / structure

• Fair basis: futures fair value = spot + financing + storage − yield (dividends/coupons/convenience); the trade exists when the market basis deviates from fair by more than friction.
• Canonical forms: equity index arbitrage (stock basket vs index futures), Treasury cash-futures basis (bond vs futures with the delivery-option complexity), commodity cash-and-carry (physical storage against the curve — ext-commodities).
• Parameters (engine-executable): pair (cash instrument + contract), fair-value model inputs (rate, dividend/coupon stream, storage), entry threshold (basis deviation vs cost), exit (convergence vs threshold reversion), financing assumptions, margin buffer (ms-futures-margin).
• Convergence guarantee: at expiry, futures settle to spot by construction — the anchor that makes basis trades bounded in thesis, though not in path.

When it applies

Rate/carry expression with tight risk anchors; capital with access to both legs (cash equities/bonds and futures); convergence horizons matched to contract expiry. On this platform, basis appears mostly at observation scale — the basis as a stress/financing signal — since institutional basis capture is capacity- and financing-intensive.

Risk profile & failure modes

• Path risk before convergence: the basis can widen violently before it converges — March 2020’s Treasury cash-futures basis dislocation forced leveraged basis books to liquidate at maximum width (a documented, Fed-studied episode); leverage converts a convergent trade into a margin event (acct-margin-rules).
• Financing repricing: the trade’s profit is a spread over funding; funding costs moving mid-trade repriced the whole position.
• Model error in fair value: dividend surprises, delivery options (cheapest-to-deliver switches in bond futures), and storage-cost changes move “fair” — the anchor is estimated, not given.
• Capacity and crowding: the same trade across many leveraged holders makes the unwind correlated.

Evidence & limits

Convergence mechanics and fair-value arithmetic are exchange- documented (CME). The March 2020 basis unwind is documented in official-sector studies (Federal Reserve and BIS analyses of the Treasury market dislocation) — cited here as the canonical failure mode. Retail-scale basis capture after friction is generally marginal; the entry’s platform value is the signal content of basis levels (ms-futures-roll, strategy-futures-carry).

Falsifiable-thesis examples

Illustrations only, not signals:

• “The index futures basis, at B today vs fair value F, will converge to within |F ± ε| by expiry” — guaranteed at expiry; the falsifiable part is the path: “without exceeding 2× today’s deviation en route” — falsified by the basis series.
• “The Treasury cash-futures basis will not widen beyond X ticks this quarter (no funding-stress episode)” — falsified by the spread series.

Cross-references

• Curve family: strategy-futures-carry, strategy-futures-calendar-spread, ms-futures-roll
• Options analogue (parity deviations): opt-put-call-parity, strategy-box-spread
• Stress reading: regime-liquidity, event-fomc
• Mechanics: ms-futures-margin, acct-margin-rules