Provide an Example of a Scenario That Would Increase Basis Risk.
An example is a sudden, unexpected regulatory announcement affecting only the spot market of a cryptocurrency, but not the derivatives exchange. If the spot price drops sharply due to the news while the futures contract price on a foreign exchange lags in reaction, the basis (difference) widens significantly, increasing basis risk for a hedger.
Glossar
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.
Cost of Carry
Calculation ⎊ The Cost of Carry for a crypto derivative position quantifies the net expense incurred from holding the underlying asset until the contract's expiration or settlement date.