What Is ‘Basis Risk’ in the Context of Futures Trading?

Basis risk is the financial risk that the price of the futures contract will not move in perfect correlation with the price of the underlying asset it is meant to track. The 'basis' is the difference between the futures price and the spot price.

Basis risk arises when this difference unexpectedly widens or narrows, causing a hedger's position to be imperfectly offset. In perpetual swaps, while the funding rate attempts to minimize the basis, there is always a risk that the contract price deviates from the spot price, especially during high volatility.