How Can Basis Risk Be Minimized or Managed?

Basis risk can be minimized by selecting a hedging instrument that closely matches the underlying asset being hedged. This means choosing a futures or forward contract with the same underlying commodity, delivery location, and expiration date, if possible.

When a perfect match is not available, a trader can analyze historical price relationships between the asset and various hedging instruments to find the one with the highest correlation. Regularly monitoring and adjusting the hedge as market conditions change can also help manage basis risk effectively.