Define the Term “Basis Risk” in the Context of Hedging a Stablecoin Position with a Derivative

Basis risk is the risk that the value of a derivative contract will not perfectly offset the loss in the underlying asset being hedged. In stablecoin hedging, basis risk occurs if the derivative used (e.g. a futures contract on the stablecoin) does not track the stablecoin's price perfectly, or if the futures contract's expiration date does not align with the hedge period.

A severe de-peg of the stablecoin may not be fully covered by the derivative's movement.