Basis risk

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Basis risk in finance is the risk associated with imperfect hedging using futures. It could arise because of the difference between the asset whose price is to be hedged and the asset underlying the derivative, or because of a mismatch between the expiration date of the futures and the actual selling date of the asset.

Under these conditions, the spot price of the asset, and the futures price, do not converge on the expiration date of the future. The amount by which the two quantities differ measures the value of the basis risk. That is,

Basis = Spot price of hedged asset - Futures price of contract

Example Of Basis Risk Treasury bill future being hedged by two year Bond, there lies the risk of not fluctuating as desired.

Basis risk said to be lowest in OTC markets

See also

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