# How Does the Concept of 'Basis Risk' Affect an OTC Desk's Hedging Strategy? ▴ Learn

**Published:** 2025-11-08
**Categories:** Learn

---

## How Does the Concept of ‘Basis Risk’ Affect an OTC Desk’s Hedging Strategy?

Basis risk is the risk that the price of the asset being hedged (the spot asset) and the price of the hedging instrument (e.g. a futures contract) do not move in perfect correlation. An OTC desk faces basis risk if the spread between the spot price and the futures price widens or narrows unexpectedly, potentially leading to losses on the hedged position despite the spot trade being covered.

What Is a ‘Perpetual Swap’ and How Is Its Funding Rate Used in Hedging?

Explain the Concept of ‘Impermanent Loss’ in Liquidity Provision

What Is the Primary Role of an OTC Desk in Facilitating Institutional Crypto Block Trades?

How Does Basis Risk Affect the Profitability of a Hedging Strategy?

## Discover More

- 
### [Define Impermanent Loss and Its Calculation Basis](https://crypto.greeks.live/learn/define-impermanent-loss-and-its-calculation-basis/)
![A stylized, four-pointed, crystalline structure intersects larger, muted triangular planes against absolute blackness evoking a complex financial instrument's cross-section. This visualization mirrors the intricate pathways of embedded options within DeFi protocols such as structured products or tokenized assets, specifically representing volatility skew surfacing during rapid liquidation cascades. The central nexus signifies a shared liquidity pool or a master contract address coordinating multiple atomic swaps. Keywords include implied volatility surface gamma exposure collateralized debt positions non-fungible options execution settlement layer arbitrage opportunities and decentralized exchange order book dynamics illustrating synthetic asset creation. The design suggests interwoven derivative layers requiring precise Black Scholes adaptations for accurate risk parity management.](https://crypto.greeks.live/wp-content/uploads/2025/10/Decentralized-Finance-Star-Formation-Analyzing-High-Frequency-Algorithmic-Option-Strike-Structures.jpg)

Impermanent loss is the value difference between pooling assets and holding them, calculated by the ratio change of the token pair.

- 
### [What Is the Primary Risk of a Covered Call Strategy in Cryptocurrency Options?](https://crypto.greeks.live/learn/what-is-the-primary-risk-of-a-covered-call-strategy-in-cryptocurrency-options/)
![This abstract rendering portrays sleek, overlapping, translucent cyan and pale grey forms suggesting complex layering within a financial architecture. Four sharp, mirrored struts converge at a central nexus atop a smooth, luminous spherical body, evoking rapid convergence or a multi-axis hub. Conceptually, this illustrates the intricate ballet of embedded options structures within decentralized finance DeFi perpetual swaps, specifically modeling non-linear payoff profiles across sequential funding rate epochs. The structure suggests the dynamic nature of volatility surface mappings and strike price determination for European-style options versus American-style settlement mechanisms in regulated digital asset instruments. Precision in modeling implied volatility skew across varying time horizons remains paramount for accurate options pricing models supporting synthetic asset creation, reflecting the complex interplay between Delta hedging and Gamma exposure management in volatile cryptocurrency markets subject to flash loan arbitrage pressure.](https://crypto.greeks.live/wp-content/uploads/2025/10/Abstract-Visualization-of-Decoupled-Expiration-Schedules-in-High-Frequency-Crypto-Derivatives-Execution.jpg)

The primary risk is capping potential upside profit if the underlying cryptocurrency price significantly exceeds the strike price.

- 
### [How Is the Trailing Percentage Typically Determined in a Crypto Trading Strategy?](https://crypto.greeks.live/learn/how-is-the-trailing-percentage-typically-determined-in-a-crypto-trading-strategy/)
![This macro photograph captures a finely machined metallic spindle assembly anchoring a variegated dielectric component suggesting cryptographic key management or a non-fungible token asset representation. The sharp metallic arms resemble settlement indicators or strike price probes traversing a reflective substrate implying a secure ledger surface or exchange order book depth. The object atop, exhibiting blue and grey banding, symbolizes complex collateralized debt positions or layered liquidity provisioning critical for decentralized finance protocol solvency and synthetic asset valuation models like Black-Scholes applications adapted for extreme volatility regimes observed in DeFi option vaults and high-frequency crypto market microstructure arbitrage strategies involving perpetual futures. This apparatus speaks to the intricate engineering required for robust on-chain execution environments and counterparty risk mitigation against malicious network actors.](https://crypto.greeks.live/wp-content/uploads/2025/10/Precision-Actuator-Apex-Stabilizing-Exotic-Digital-Asset-Hedging-Instrument-Mechanism.jpg)

It is set based on the asset's volatility (ATR) and risk tolerance, wide enough to avoid noise but tight enough to protect profit.

- 
### [How Does the ‘Basis’ Relate to the Funding Rate in a Futures or Swap Contract?](https://crypto.greeks.live/learn/how-does-the-basis-relate-to-the-funding-rate-in-a-futures-or-swap-contract/)
![This abstract composition displays two overlapping planes forming a sharp X-pattern, featuring a stark division between near-absolute darkness and a deep cyanic luminescence, suggestive of differing market states or counterparty exposures within decentralized finance. The intersection highlights small perforations along the central seam, perhaps symbolizing key execution points or oracle confirmations necessary for smart contract settlement. This visual dichotomy mirrors the bifurcation of risk profiles inherent in leveraged delta-neutral option strategies applied to volatile crypto assets, where the underlying perpetual futures basis dictates the funding rate arbitrage. It represents the tension between long and short exposures, the latent stochastic process modeling the asset price path divergence, and the critical nature of determining accurate Greeks calculation within high-frequency derivative operations across various layer two scaling solutions.](https://crypto.greeks.live/wp-content/uploads/2025/10/Cross-Sectional-Overlays-of-Digital-Asset-Bifurcation-Indicating-Implied-Volatility-Surface-Dynamics.jpg)

The basis is the price difference between the derivative and the spot asset; the funding rate aims to keep the basis near zero.

- 
### [How Does the ‘Gamma’ of an Option Affect a Market maker’S Hedging Strategy and the Underlying Asset’s Liquidity?](https://crypto.greeks.live/learn/how-does-the-gamma-of-an-option-affect-a-market-makers-hedging-strategy-and-the-underlying-assets-liquidity/)
![The rendered composition suggests a nascent decentralized exchange ledger system featuring a central bisected apparatus resembling folded digital assets or bifurcated option contracts. The smooth ovoid base implies a stable base layer analogous to a custody solution or an atomic swap initiation point. Subtle crystalline reflections on the transparent structure evoke secured key management or time-locked smart contract execution paths. Small, precise nodules represent oracle feeds or designated collateralization points critical for decentralized finance perpetuals mechanisms. This visual metaphor aligns with algorithmic arbitrage opportunities arising from transient volatility exposure in novel DeFi yield farming protocols demanding robust risk parity management across complex synthetic asset structures like exotic options. The interplay of deep cyan and muted beige light signifies the contrast between underlying asset price discovery and derivative premium valuation inherent in high-frequency crypto option market making.](https://crypto.greeks.live/wp-content/uploads/2025/10/Abstract-Visualization-of-Cryptocurrency-Derivative-Hedging-Strategies-Through-Bifurcated-Transparent-Contract-Elements.jpg)

Gamma is the accelerator for an option's price change, forcing market makers to constantly trade the underlying asset.

- 
### [How Is Collateral Used to Manage Counterparty Risk in Bilateral OTC Derivative Trades?](https://crypto.greeks.live/learn/how-is-collateral-used-to-manage-counterparty-risk-in-bilateral-otc-derivative-trades/)
![A highly textured, monolithic sphere featuring concentric receding geometric layers dominates the left frame, suggesting immutable blockchain architecture or a genesis block. A thin, perfectly balanced planar structure extends horizontally from this core, supporting a singular, highly reflective, dark cryptographic asset representation resembling a perfectly weighted option contract. The dark void above contrasts sharply with the teal-tinged atmospheric layers below, mimicking the perceived risk/reward asymmetry in perpetual futures trading. This visual metaphor speaks to the delicate calibration required for maintaining delta-neutrality across complex derivative payoff structures and the inherent instability of on-chain governance when facing external market shocks. Keywords include: stochastic volatility surface implied mean reversion at the money forward liquidity vacuum arbitrage simulation dark pool settlement.](https://crypto.greeks.live/wp-content/uploads/2025/10/Galactic-FinTech-Abstraction-of-Volatility-Surface-Equilibrium-Beneath-Deep-Dark-Pool-Liquidity.jpg)

The losing side of an OTC trade posts collateral to the winning side to cover potential default losses.

- 
### [How Does a Change in Custody Risk Influence the Futures Basis?](https://crypto.greeks.live/learn/how-does-a-change-in-custody-risk-influence-the-futures-basis/)
![This abstract rendering visualizes the complex topology of decentralized finance DeFi protocols, specifically focusing on automated market maker AMM curves within liquidity pools. The luminous cyan conduit suggests a high-frequency data stream or token flow, perhaps representing slippage tolerance in large block trades or the inner workings of a synthetic asset pathway. Subdued, matte grey spheres imply underlying collateral or reserved assets underpinning decentralized ledger technology DLT. The composition evokes algorithmic execution across volatile markets, where continuous funding rates maintain equilibrium against potential oracle manipulation. This structure embodies the opaque yet mathematically rigid backbone of structured products like perpetual swaps and dynamic hedging strategies in exotic crypto options.](https://crypto.greeks.live/wp-content/uploads/2025/10/Illuminated-Cyanic-Digital-Tubing-Encircling-Subdued-Spherical-Volumetric-Structures-Abstracted-Financial-Modeling.jpg)

Increased custody risk can widen the basis by changing the perceived risk of holding the spot asset.

- 
### [How Can a Crypto Holder Use a “Covered Call” Strategy?](https://crypto.greeks.live/learn/how-can-a-crypto-holder-use-a-covered-call-strategy/)
![The visualization depicts a highly polished, translucent, aerodynamically stylized propeller assembly against a deep black background suggesting a vacuum or deep space environment. The interplay of cyan, cream, and opaque dark reflective surfaces illustrates the complex, layered mechanics underpinning digital asset valuation models. This abstract representation evokes the rapid, systematic movement characteristic of high-frequency trading HFT strategies navigating decentralized exchange liquidity pools. Key concepts manifest as the kinetic energy implying leveraged positions, the transparency suggesting atomic swap visibility, and the propeller's rotational blur mirroring continuous market microstructure adjustment. The overall aesthetic points toward volatile premium decay applied to sophisticated exotic options structures executed via automated market makers or lightning network channels requiring robust oracle integration for accurate settlement risk assessment.](https://crypto.greeks.live/wp-content/uploads/2025/10/Visualizing-High-Frequency-Algorithmic-Trading-Propeller-Dynamics-Within-Decentralized-Finance-Protocols.jpg)

A covered call is selling a call option while owning the underlying crypto to earn premium income and cap upside profit.

- 
### [If Put-Call Parity Is Violated, What Arbitrage Strategy Could a Trader Employ?](https://crypto.greeks.live/learn/if-put-call-parity-is-violated-what-arbitrage-strategy-could-a-trader-employ/)
![This diagram reveals a sophisticated internal architecture, suggesting a precision mechanism for managing complex financial instruments like exotic options or perpetual swaps. The beige casing contrasts sharply with the luminous cyan internal components, potentially symbolizing transparency versus opaque legacy finance structures. Visible are intricate metallic coils, perhaps representing liquidity provisioning within a staked collateral pool or the underlying logic for automated market maker bonding curves. The design evokes concepts of secure cryptographic settlement layers and deterministic smart contract execution underpinning digital asset derivatives. This schematic parallels the robust engineering required for managing high-frequency decentralized exchange order books and mitigating systemic risk through overcollateralization mechanisms essential for novel DeFi primitives. Keywords include delta hedging algorithmic iteration collateralized debt positions synthetic asset replication stochastic volatility modeling automated liquidation engines.](https://crypto.greeks.live/wp-content/uploads/2025/10/Cross-Sectional-Examination-of-Mechanism-Governing-Decentralized-Autonomous-Organization-Governance-Protocol-Execution.jpg)

The trader buys the underpriced portfolio and sells the overpriced, locking in a risk-free profit because payoffs are identical at expiration.

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