How Can a Hedger Attempt to Minimize Basis Risk?

A hedger can minimize basis risk by choosing a futures contract whose underlying reference asset closely matches the asset being hedged. They should also select a contract with an expiration date close to when the underlying asset transaction is expected.

Using highly liquid contracts and exchanges helps ensure the futures price accurately reflects market expectations. Finally, they can actively monitor the basis and adjust the hedge ratio if the basis widens unexpectedly.