How Does the Concept of “Basis Risk” Relate to Derivative Hedging?
Basis risk is the risk that the price of the derivative used for hedging (e.g. a futures contract) does not perfectly correlate with the price of the underlying asset being hedged (e.g. the spot token). This imperfect correlation means the hedge will not be 100% effective, leaving the DAO with some residual price exposure.
Glossar
Centralized Clearing
Function ⎊ Centralized clearing refers to a system where a central counterparty CCP interposes itself between buyers and sellers of financial instruments, particularly derivatives.
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.
Imperfect Correlation
Correlation ⎊ Imperfect correlation, within the context of cryptocurrency derivatives and financial markets, describes a scenario where the expected relationship between two assets or variables deviates from a perfect, one-to-one association.