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Definition of Basis Grade

The basis grade for a given commodity is the standard grade for the quality of a commodity that may be delivered under the settlement of a futures contract.

Applying "Basis Grade" to Securities Exams:

Having a minimum quality standard ensures a buyer that he or she will receive a grade of commodity suitable for their needs. The basis grade also informs the seller or delivering party of the minimum quality that may be accepted for delivery under the contract. If a seller delivers a commodity in an inferior grade, the exchange may allow the seller to deliver the inferior or substitute grade at a discounted price to the buyer. Alternatively, if the seller delivers a substitute grade of the commodity that is superior to the basis grade, the seller may demand a premium upon delivery. Th e exchange will set limits as to what substitute grades (inferior and superior) may be delivered to settle futures contracts.

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