How Does a Miner Mitigate Basis Risk When Using a Futures Hedge?
Miners can mitigate basis risk by choosing a futures contract that expires as close as possible to the date they expect to sell their mined learn. They can also use highly correlated futures contracts if a direct contract is unavailable, though this introduces "cross-hedging" risk.
Furthermore, they must closely monitor the basis throughout the life of the contract and be prepared to adjust their hedge ratio if the correlation between the spot and futures price changes unexpectedly.
Glossar
Liquidity
Depth ⎊ Liquidity, in the context of financial markets, is the degree to which an asset or derivative contract can be bought or sold quickly without significantly impacting its price, primarily measured by the depth of the order book.
Basis Risk
Exposure ⎊ The core of basis risk within cryptocurrency derivatives, particularly options, stems from the imperfect correlation between the price movements of the underlying asset and its derivative contract.
Correlation
Interdependence ⎊ The concept of correlation, within cryptocurrency derivatives and options trading, fundamentally describes the statistical relationship between two or more assets, indices, or variables.
Correlated Futures Contracts
Correlation ⎊ This concept describes futures contracts whose underlying assets exhibit a statistically significant positive or negative relationship in their price movements.
Hedge Ratio
Calculation ⎊ The Hedge Ratio quantifies the necessary size of a derivative position required to offset the price risk inherent in an underlying asset or portfolio, representing the change in the derivative's price relative to the change in the underlying.
Collateral
Asset ⎊ Collateral, within the domain of crypto derivatives and decentralized finance, refers to the digital asset or assets pledged by a market participant to secure a loan or to cover potential losses on a leveraged trading position.