Futures–Spot Basis Hedging Through Convergence
Summary
The document uses a backtest walkthrough to explain a cash-and-carry style hedge: short a quarterly Bitcoin futures contract while buying spot BTC, then close both legs after the futures premium narrows. It compares executable futures and spot quotes at entry and exit, tracks the resulting basis, and estimates combined profit by comparing the changes in the two accounts. The example shows the futures–spot spread shrinking during the holding period, even as both market prices fall.
The core condition is that the futures premium over spot is smaller at exit than at entry; with matched exposure, this basis change can produce a gain across different outright price paths. The example is educational and platform-specific, using a historical simulation with filled orders. It does not establish repeatable profitability or account for a full treatment of fees, funding, margin, contract sizing, execution slippage, and basis risk. The strategy depends on managing both legs and on actual convergence; price movements or imperfect hedge ratios can still create losses.
Key ideas
- A futures–spot hedge pairs a short futures position with a long spot position.
- The trade seeks to profit when the futures premium over spot contracts between entry and exit.
- The walkthrough compares bid and ask prices for opening and closing both legs, then checks account changes.
- Matched exposure can make the outcome depend more on basis movement than on the outright direction of Bitcoin.
- A historical backtest example does not establish reliability and leaves practical costs and execution risks to evaluate.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.