Futures Basis and Fair Value Explained

For many equity-index contracts, basis is quoted as futures price minus the cash index. A positive number means the future is above the index; a negative number means it is below.

The simple subtraction is useful only when the prices are synchronized and refer to the same economic exposure. A delayed cash index, a stale future, or an after-hours quote can create a basis that is mostly a timestamp problem.

Commodity basis has its own delivery location, grade, and calendar dimensions. A quoted spot price from another location is not automatically the deliverable underlying the futures contract.

For a simplified equity-index future, fair value grows the cash index by financing over the time to expiration and subtracts the value of dividends expected before expiration. A compact approximation is F = S × financing factor − dividend points.

The calculation requires a stated day-count convention, funding assumption, dividend estimate, and expiration date. Changing any of those inputs changes the estimate.

The output is a benchmark, not a promise that an executable quote will equal the model at every instant. Supply and demand, bid-ask spreads, balance-sheet use, and transaction costs can keep prices around the estimate.

Owning an index basket can earn dividends before futures expiration, while financing the basket has a cost. Expected dividends tend to lower an index futures fair value relative to spot; financing tends to raise it.

Both inputs are uncertain in practice. Dividend forecasts can change and the relevant funding rate may differ from a generic published rate.

This is why a basis chart needs its contract month and assumptions. The same index can show a different basis across expirations without a contradiction.

As a contract approaches its final settlement, the futures price and its final reference should converge under the contract's rules. That does not mean every intraday quote tracks the cash index tick for tick.

The final reference can be a special opening, closing, average, or delivery process. Read the contract specification rather than applying the settlement convention of another product.

Rolling from one month to the next also replaces one basis with another. A continuous price chart can hide that handoff unless its roll convention is disclosed.

Record the future's bid or ask, the cash reference timestamp, contract multiplier, remaining days, expected dividends, financing estimate, fees, and available size. Then calculate a tradable range rather than one precise number.

An apparent fair-value gap may be smaller than the spread, vanish after the cash price updates, or be inaccessible because the required basket cannot be traded at the assumed level. This check is analysis, not an instruction to arbitrage.