What Is Basis Risk in a Cryptocurrency Futures Hedge?
Basis risk is the risk that the price of the futures contract does not move in perfect correlation with the price of the underlying cryptocurrency being hedged. In a mining context, if the spot price of the mined coin drops but the futures price does not drop proportionally, the short futures hedge will not fully cover the loss in the value of the mined coins.
Glossar
Short Futures
Position ⎊ A short futures position represents a contractual obligation to sell a specified quantity of an underlying asset at a predetermined price on a future date.
Futures Price
Derivatives ⎊ The futures price, within cryptocurrency and financial derivatives, represents the contractual agreement to buy or sell an asset at a predetermined price on a specified future date.
Spot Price
Valuation ⎊ The spot price in cryptocurrency, options, and derivatives represents the current market-clearing price for immediate delivery of the underlying asset, functioning as a fundamental benchmark for pricing more complex instruments.
Cryptocurrency Futures
Leverage ⎊ Cryptocurrency futures contracts represent agreements to buy or sell a specified quantity of a cryptocurrency at a predetermined price on a future date, functioning as a derivative instrument.
Futures Contract
Leverage ⎊ Futures contracts in cryptocurrency represent agreements to buy or sell an underlying asset at a predetermined price on a future date, functioning as a derivative instrument that allows for amplified exposure without immediate asset ownership.
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.