Explain the Concept of “Basis Risk” in Futures Trading

Basis Risk is the potential for loss that arises from an unexpected change in the relationship between the price of a futures contract and the price of the underlying cash asset being hedged. The "basis" is the difference between the two prices.

If the basis does not move as expected (i.e. it widens or narrows unexpectedly), the hedge will be imperfect, leading to Basis Risk.