Basis in case Future

The futures price is a bit like a forward rate and the price will change from day to day depending on market forces and how long there is up to the date it matures.
On the last day of the future the futures price must clearly be the same as the spot rate on that day and so the basis must have fallen to zero.

Nobody says that the basis will fall linearly to zero – there is no reason that has to be the case in practice. However it will fall to zero and we make the assumption that it will be falling linearly in order to be able to plan the hedging of the risk using futures. Using futures is unlikely to give a perfect hedge – one of the reasons is that the basis may not fall linearly.

I do explain this in my free lectures on foreign exchange risk management.

You are welcome 🙂