Basis

In a futures market, basis is defined as the cash price (or spot price) of whatever is being traded minus its futures price for the contract in question. It is important because changes in the relationship between cash and futures prices affect the value of using futures as a hedge. A hedge, however, will always reduce risk as long as the volatility of the basis is less than the volatility of the price of whatever is being hedged.

Backwardation

In a furures market the price of a contract for future delivery of, say, a commodity usually trades above the spot price because the notional interest received from holding cash rather than the underlying commodity is added to the cost of the contract. Sometimes, however, demand for the commodity pushes the spot price above the futures price. This is a backwardation, also known as an inverted market.