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Answer: Basis strengthens by +$0.20
## Explanation **Basis Calculation**: - Basis = Spot Price - Futures Price **May Basis**: - S1 = $7.00, F1 = $9.00 - Basis1 = $7.00 - $9.00 = -$2.00 **August Basis**: - S2 = $7.30, F2 = $9.10 - Basis2 = $7.30 - $9.10 = -$1.80 **Change in Basis**: - Basis2 - Basis1 = (-$1.80) - (-$2.00) = +$0.20 **Interpretation**: - The basis increased from -$2.00 to -$1.80, which is an increase of +$0.20 - When basis becomes less negative (or more positive), this is called **basis strengthening** Therefore, the basis strengthens by +$0.20, making option C correct.
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The May 2011 spot price (S1) of wheat is $7.00 per bushel and the December 2011 futures price (F1) is $9.00. Going forward three months to August, assume the spot price (S2) of wheat increases to $7.30 and the December 2011 futures price (F2) increased to $9.10. What happens to the basis between May and August?
A
Basis strengthens by +$0.10
B
Basis weakens by +$0.10
C
Basis strengthens by +$0.20
D
Basis weakens by -$0.20
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