zwjy

bern

First a minor point basis is not F - S but it is S - F

More importantly, Futures price is expected to follow an expected path of convergence to spot, i.e the Value of (S0 - F0) is expected to diminish to zero when contract expires. The risk is that the Futures price deviates from this expected path. This risk is important as the Futures position may not be held till expiration.

If the basis reduced from (S0 - F0) to 0 exactly along expected path, then there is no basis risk. In other words the expected carry benefit, storage and financing costs experienced are exactly as expected when futures were priced at time 0.

Confusing?