Guide to Analysing Companies

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BASIS
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between today’s price for a Treasury bond and the price
of an option or futures contract in three months’ time.
 The relationship between the prices of similar
financial instruments in two or more related, but
not identical, markets (see basis risk).
 The yield to maturity for a bond at a given price; for
example, a bond with an interest rate of 10% that sells for
$100 has a basis of 10%.
 The price established by common consent for odd lots of
a security between two dealers on a stock
exchange.
Basis point
A unit of measure used to express small movements in the
rate of interest, foreign-exchange rates, or bond
yields. One basis point is one-hundredth of a percentage point.
So the differential between a bond yield of 5.38% and 5.79% is
41 basis points.
Basis price
See strike price.
Basis risk
The possibility that an investor will lose money because the
forward price of an option or futures contract and the
current (or cash) price will drift apart. It also refers to the
danger that an investor will fail to offset the risk from two or
more options or futures contracts; for example, if a trader has
borrowed Swiss francs to purchase a futures contract but can
only protect that investment by selling a contract denominated
in euros. The basis risk would be the danger that the two cur-
rencies would diverge during the period of the contract. Basis
risk also refers to mismatches in the maturity of financial in-
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struments; for example, where an investor buys an interest-
rate option expiring in three months to hedge another con-
tract that is due to mature in six months.
Basis risk has become increasingly important in recent years
as banks and other financial institutions attempt to lay off a
variety of risks by buying or selling derivatives. If the basis
risk is too great, there may be no point in entering into a trans-
action because of the danger that it will fail to do what it was
designed to do.
Basis trade
A form of arbitrage whereby an investor buys bonds for
cash and sells them to others in the futures market (that is,
sells a right to the bonds in the future at a price agreed now).
The investor calculates that the cash price plus the cost of “car-
rying” the investment until the futures contract matures will
be lower than the price paid for the future. Hence the name
“cash and carry trade” given to such deals. “Buying the basis”
usually refers to buying bonds in the cash market and selling
futures contracts; “selling the basis” means selling cash bonds
and buying the futures.
No price is too low for a bear or too high for a bull. 
Stock Exchange proverb
Bear
An investor who thinks that the price of an individual secu-
rity (or a whole market) is going to fall. A bear, therefore, may
sell securities in anticipation of being able to buy them back
later at a lower price. Alternatively, bears may buy futures
contracts that commit them to selling securities at a fixed price at
a future date. They anticipate that the fixed price will be higher
than the price they will have to pay for the securities in the cash
or spot market on that future date. (See also bull.)