Hedging and Basis

Basis is a crucial factor on which hedging decisions are based. The matrix of sale and purchase for producers and consumers on basis is given below:

Long Hedge

High Cash Price Low Cash Price
Strong Basis Delay Cash Purchase
No Hedging Required
  • Delay Cash Purchase
  • Hedge - Long Futures
Weak Basis Purchase immediate
requirements only
Purchase as much as possible and store or Hedge using futures

Short Hedge

High Cash Price Low Cash Price
Strong Basis Sell Product in Cash
  • Sell Produce
  • Re-own by going long on futures
Weak Basis
  • Delay Cash Sales / Store Produce
  • Hedge - Short Futures
Store for selling later


The long hedger or the consumer of the commodity prefers for the basis to weaken. In this scenario, the cash price will be lower than futures and hence the hedger's procurement price in the spot market will be less than the futures market.

The short hedger or the producer of the commodity prefers for the basis to strengthen. In this scenario the cash price will be higher relative to the future and the hedger realizes a higher selling price in the spot market than the futures market.

In the next chapter we will learn how to trade in commodities market.


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