Explain the Concept of “Calendar Spread Risk” in Relation to Basis

Calendar spread risk is the risk that the price difference between two futures contracts with different expiration dates (a calendar spread) will change unexpectedly. This is a form of basis risk because the basis of the hedge is essentially the difference between the spot price and the chosen futures contract price.

If a hedger "rolls" their position to a later contract, an unexpected change in the calendar spread will affect the overall cost or gain of the roll, impacting the effectiveness of the original hedge.