A hedge can leave a gap behind. | Canvas of Knowledge

Name the two prices

A silver producer may care about the price received for its output. An industrial user may care about the delivered cost of usable silver. A futures contract references a specified product, location and delivery framework. Those prices can be related without matching. Before evaluating a hedge, identify the actual cash quotation, currency, quality, location and timing, then compare them with the contract being used. A similar label does not establish identical exposure.

Define the sign convention

Here, basis means cash price minus futures price. If a hypothetical local cash quote is $29 per ounce and the relevant futures quote is $30, the basis is −$1 per ounce. Some sources use the opposite convention, so always check the definition before interpreting an increase or decrease. Under our convention, a strengthening basis means cash rises relative to futures, or falls less. It does not necessarily mean either outright price rises.

Understand what remains unhedged

A producer that sells futures may offset part of a fall in its selling price with a gain on the hedge. A user buying futures may offset part of a rise in its purchase cost. The match can be imperfect if local premiums, delivery costs, quality adjustments or the relevant dates change differently. Quantity mismatches and currency exposure can add further differences. Hedging can reduce a targeted risk while leaving other sources of uncertainty.

Measure the combined outcome

Assess the cash transaction and hedge together, using consistent units and dates. A favourable result on one leg may simply compensate for an unfavourable result on the other. Monitor changes in the chosen basis and explain any mismatch instead of judging the futures leg in isolation. Historical co-movement can inform a hedge, but it does not guarantee future alignment. Contract suitability, execution costs and collateral requirements also affect what the hedge achieves.

FOLLOW THE EVIDENCE

Sources & further reading

Sources checked 14 November 2026. Reference organisations do not endorse this website. Price examples are hypothetical and educational.