What Is “Basis Risk” in Derivatives Trading?
Basis risk is the risk that the price of the underlying asset being hedged does not move in perfect correlation with the price of the derivative used to hedge it. The "basis" is the difference between the spot price of the asset and the futures price.
Basis risk arises when the basis changes unexpectedly between the time the hedge is initiated and when it is closed out. This imperfect correlation can lead to unexpected losses in the hedged position.
Glossar
Unexpected Losses
Definition ⎊ Unexpected losses refer to financial losses that exceed the predicted maximum loss calculated by risk management models, such as Value at Risk (VaR).
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.
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.