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Answer: A one-day futures contract on S&P 500 Index in contango
The basis percent is closest to zero when the futures price is closest to the spot price. A **one-day S&P 500 futures contract** is most likely to be nearest to spot because: - It is extremely close to expiration, so convergence is almost complete. - Equity index futures typically have very low delivery frictions compared with physical commodities. By contrast: - A six-month corn future in contango can have a sizable basis because of carry costs. - Wheat with high delivery costs can still have a meaningful basis. - Oil with backwardation and high convenience yield can also have a substantial basis. Therefore, the correct answer is **C**.
Author: Manit Arora
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Question 143.3 Following Hull, let basis(t) = spot(0) - futures(t). Further, let basis percent(t) = basis(t)/spot(0); i.e., basis as a percentage of the spot price. Which of the following is most likely to have a basis percent(t) NEAREST to zero?
A
A six-month futures contract on corn in contango
B
A one-day futures contract on wheat in contango with high delivery (transportation) costs
C
A one-day futures contract on S&P 500 Index in contango
D
A six-month oil futures contract in backwardation and high convenience yield
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