What Are the Main Causes of Basis Risk?

The main causes of basis risk stem from mismatches between the hedged asset and the hedging instrument. This includes differences in the underlying asset, such as variations in quality, grade, or type (quality basis).

Mismatches in the delivery location of the asset can create a location basis. A calendar basis can arise when the expiration date of the hedge does not align with the sale date of the asset.

Finally, changes in the relationship between spot and futures prices can also introduce basis risk.