How Does the Concept of ‘Basis Risk’ Apply When Hedging with a New Token Derivative?
Basis risk is the risk that the price of the asset being hedged (the spot token price) and the price of the hedging instrument (the token derivative) do not move in perfect lockstep. For a new token derivative, basis risk is often high due to low liquidity, differing market participants, or varying expiration dates.
If the basis (the difference between spot and future price) changes unexpectedly, the hedge will be imperfect, potentially leading to losses.
