What Is 'Basis Risk' and How Does the Exercise Style Affect It? ⎊ Path

What Is ‘Basis Risk’ and How Does the Exercise Style Affect It?

Basis risk is the risk that the price of the hedging instrument (e.g. an option on a future) does not perfectly correlate with the price of the underlying asset being hedged. The exercise style does not directly cause basis risk, but the fixed expiration of European options allows hedgers to plan for the risk better.

Early exercise of an American option could unexpectedly alter the hedge ratio, complicating basis risk management.

What Operational Challenges Would American-Style Exercise Pose for a Crypto Futures Exchange?

What Is the Difference between an American-Style and European-Style Option in the Crypto Market?

How Do American-Style Options Differ from European-Style Options in Terms of Early Exercise and Delta?

Is Execution Risk Higher for an American-Style Option or a European-Style Option?

What Is a “Cross-Hedge” and How Does It Relate to Basis Risk?

What Is the Difference between an American and European Option regarding Early Exercise and Risk?

How Does “American Style” Options Settlement Differ from “European Style” in a PoC Context?

Does the Early Exercise Rule Apply Equally to American-Style Put Options?

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.

Exercise Style

Style ⎊ This defines the procedural rule dictating when an option holder can exercise their right to buy or sell the underlying asset at the strike price.