On The Basis Used In Trade Transactions

As the developing of the economic globalization, China has been coming to ahistorical turning point. With that, to serve the industrial economy it would be whatthe futures market strive to do, and which also is insistent with the request of theeconomic development. After20years’ development, China’s futures market has got aconsiderable achievement, with the booming trading volume. More and moreenterprises and investors are taking part in the futures market. The function of thefutures market has showed sufficiently. Co-movement of futures market and spotmarket has been playing a key role for the business of hedging and avoiding risk.Basis is the difference between the spot price and futures price, showing therelative variance of the both two prices. Basis trading is based on futures market andprovides a new way for spot pricing with the working of the futures function. Pricediscovery and hedging play a crucial role on the vitality of basis pricing. More andmore business has been attracted to the futures market, to avoid risk with the use ofbasis pricing in spot market. Basis trading is a new trading model, offering a newoperation model and avoiding the price risk in traditional trading model, making thebusiness to adjust their operation ways. This kind of new trading could improve thefutures market to run better and better.This paper starts from summarizing the theory first, and then contrasts andanalysis the domestic present situation with foreign countries on using the basistrading. This paper will analysis the price discovery function of the futures marketwith the way of empirical analysis. With the graphics and actual examples to analysisthe basis and to show how basis trading works in spot trading between enterprises.From that, I hope to make the basis trading to be knew more to the market and thenwill use it in spot market, which also will affect the futures market run better in return.