Basis is the difference between the current price of the future contract and the current price of the underlying. In our example of Sita and Noor, we established that the fair value of the futures contract is Rs 1.03 crore and the price at which the future contract got executed between Sita and Noor was Rs 1.1 crore. Let’s assume that 1.1 crore is the current market price. This means that if Sita wants to sell her position in the contract there are buyers who will be willing to pay her Rs 1.1 crore to enter into the futures contract with Noor.
Let’s say Sita sells her future contract to Karishma for Rs 1.1 crore. Thus in this case, now the contract is between Karishma and Noor with Karishma holding the long position. Open Interest remains the same, as no new contract was created. Let’s say the price to buy the house today is Rs 1 crore. Thus, basis would be Rs 10 lakh (1.1 – 1), as it represents the difference between the current market price of the future contract and the current price of the underlying.