What Is “Basis Risk” in the Context of a Futures Hedge?

Basis risk is the risk that the relationship between the spot price of an asset and the futures price of its contract (the "basis") will change unexpectedly. A perfect hedge assumes the basis remains constant.

If the basis widens or narrows unexpectedly, the gain or loss on the futures contract will not perfectly offset the loss or gain on the underlying spot position, leading to an imperfect hedge outcome.