What Is ‘Basis Risk’ and How Does It Affect an Arbitrageur’s Profit Certainty?

Basis risk is the risk that the basis (Spot – Futures) will change unexpectedly between the time the hedge is placed and when the contract expires or is lifted. For an arbitrageur, this means the locked-in profit might shrink or disappear if the basis widens or narrows unfavorably.

In a perfect arbitrage, basis risk is zero because the trade is held until expiration, where convergence is theoretically guaranteed. However, if the trade is closed early, basis risk is a major factor.