What Is Basis Risk in the Context of Hedging an Altcoin Derivative with BTC?
Basis risk is the risk that the price of the altcoin derivative and the price of the BTC used as a hedge do not move perfectly in sync. Since the altcoin is not perfectly correlated with BTC, the hedge will be imperfect.
If the altcoin price moves significantly relative to BTC, the market maker can incur a loss on the hedged position. This risk is inherent when using a proxy asset like BTC to hedge an illiquid altcoin position.
It must be priced into the option premium.
Glossar
Altcoin Options
Volatility ⎊ Altcoin options represent derivative contracts granting the holder the right, but not the obligation, to buy or sell a specified quantity of an altcoin at a predetermined price on or before a specific date; their pricing is fundamentally influenced by the underlying altcoin’s implied volatility, reflecting market expectations of future price fluctuations.
BTC
Asset ⎊ The ticker represents the native digital asset of the Bitcoin network, functioning as a decentralized, scarce store of value and medium of exchange.
Calendar Spread Strategy
Construction ⎊ A calendar spread strategy, within cryptocurrency options, involves simultaneously buying and selling options contracts with the same strike price but differing expiration dates, typically aiming to profit from time decay and volatility shifts.