Basis behavior is generally considered to be the major determinant of hedging success or failure. In the course of our work as contract designers for Chicago Mercantile Exchange Inc., we have come to the conclusion that there are many misconceptions and incorrect statements made about "the basis" among practitioners and academics alike. Our work suggests that basis values, how they are measured, what they represent and how they are interpreted may differ widely from one commodity contract to another due to differences in the specifications of the underlying futures market, as well as differences in the structure of the underlying cash market.


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