How Is ‘Basis Risk’ Managed in Derivative Hedging?

Basis risk is the risk that the price of the asset being hedged (the underlying) and the price of the derivative used to hedge it do not move perfectly in sync. This can lead to the hedge being imperfect.

It is managed by selecting derivative contracts whose underlying asset is highly correlated with the asset being hedged, or by using derivatives with a similar maturity date to the exposure.