The Basis Instrument Contract is an important concept in the context of analysis of financial derivatives. The Basis Instrument Contract is a kind of representative derivative contract. This representative derivative contract is regarded as a constituent of a particular group of contract equivalence.
Use of Basis Instrument Contract
The Basis Instrument Contract helps the derivatives to be replicated in a static manner. This can be done in a market where there are many periods of trading. No model assumption needs to be made for this purpose.
The Basis Instrument Contracts could also be used to break up any derivatives contract irrespective of the complexity or lack of liquidity of the same.
Characteristic Features of the Basis Instrument Contract
Following are some of the chief characteristics of the Basis Instrument Contract:
The Basis Instrument Contracts help to figure out two parties – one or more buyers and one or more sellers
The definition of each and every Basis Instrument Contract is made up of three dates – the date of contract agreement, the date of expiry of the contract and the date of payment of premium
The Basis Instrument Contract includes conceptual amounts that are supposed to be functions of the obtained values of underlying derivative contracts and other derivatives contracts that may be connected to them
Contract Agreement Date of Basis Instrument Contracts
The contract agreement date of the Basis Instrument Contract is noted as t0. This is the date at which the buyer and seller of the contract finally decide the various terms and conditions.
Premium Payment Date of Basis Instrument Contracts
The premium payment date of the Basis Instrument Contracts is known as ti. It is the date at which the buyer fulfils his contractual commitment. He pays the seller the premium that had been agreed in the contract.
Contract Expiry Date of Basis Instrument Contracts
The contract expiry date of the Basis Instrument Contracts is also known as the maturity or payout payment date. It is represented as tj. It is the date when the sellers pay the buyers the payout amount.
Last Updated on : 1st July 2013