What Is the Concept of ‘Basis Risk’ in Futures Trading?
Basis risk is the risk that the price of the futures contract will not move perfectly in line with the price of the underlying spot asset. The 'basis' is the difference between the futures price and the spot price.
Basis risk arises when the basis unexpectedly widens or narrows, potentially causing a hedging strategy to be less effective or an arbitrage strategy to lose money. It is a key non-directional risk in derivatives trading.
