In a futures market, basis is defined as the cash price (or spot price) of whatever is being traded minus its futures price for the contract in question. It is important because changes in the relationship between cash and futures prices affect the values of using futures as a hedge. A hedge, however, will always reduce risk as long as the volatility of the basis is less than the volatility of the price of whatever is being hedged.

Basis Point

One hundredth of a percentage point. Basis points are used in currency and bond markets where the size of trades mean that large amounts of money can change hands on small price movements . Thus if the yield on a Treasury bill rose from 5.25% to 5.33% the change would have been eight basis points.

Basis Risk

The risk that the relationship between the prices of a security and the instrument used to hedge it will change, thereby reducing the effectiveness of the hedge. In other words, risk of varying fluctuations of the spot and the futures price between the moment at which a position is opened and the moment at which it is closed.

Bid

An offer of a price to buy as in an auction is a bid. Business on the Stock Exchange is done through bids. Bid also refers to the price one is willing to pay for a security.

Bid Spread

The difference between the stated and /or displayed price at which a market maker is willing to sell a security and the price at which he is willing to buy it.

Bid – Ask spread

The difference between the bid price and the ask price.