How Can a Trader Attempt to Minimize Basis Risk When Hedging?

A trader can minimize basis risk primarily by using a futures contract that is highly correlated with the asset being hedged and has an expiration date close to when the hedge is needed. Furthermore, choosing a contract that is based on the same underlying asset or index as the spot position is crucial.

Traders also often monitor the historical basis relationship and may adjust the hedge ratio if they anticipate an unusual divergence between the spot and futures prices.