Skip to main content

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.

What Is the Primary Difference between Cash-Settled and Physically-Settled Futures?
How Does the Settlement Process Differ between Cash-Settled and Physically-Settled Futures?
Is Basis Risk Present in Both Physically-Settled and Cash-Settled Futures?
Explain the Difference between Physically-Settled and Cash-Settled Futures Contracts