Does Basis Risk Exist in Physically Settled Futures Contracts?
Yes, basis risk still exists in physically settled futures, but it is typically reduced at expiration compared to cash-settled contracts. While the futures price must converge to the spot price at expiration, the basis risk remains throughout the life of the contract.
Furthermore, a hedger may still face basis risk if they liquidate their physical position at a different location or time than the futures delivery.
Glossar
Basis Risk
Exposure ⎊ The core of basis risk within cryptocurrency derivatives, particularly options, stems from the imperfect correlation between the price movements of the underlying asset and its derivative contract.
Physically Settled
Settlement ⎊ Physically settled derivatives contracts require the actual transfer of the underlying asset from the short position holder to the long position holder at maturity.
Physically Settled Contract
Contract ⎊ This derivative instrument mandates the actual delivery or transfer of the underlying cryptocurrency asset upon exercise or maturity, rather than a cash settlement based on the price difference.
Physically Settled Futures
Settlement ⎊ Physically settled futures contracts in cryptocurrency derivatives represent a distinct mechanism where the contract's final value is determined by the actual delivery of the underlying digital asset, rather than a cash settlement.