What Is the Concept of Basis Risk in Hedging with Derivatives? ▴ Learn

What Is the Concept of Basis Risk in Hedging with Derivatives?

Basis risk is the risk that the price of the asset being hedged (the spot price) and the price of the derivative used to hedge it (the futures or forward price) do not move in perfect correlation. This imperfect correlation means the hedge may not completely offset the underlying price exposure, leading to unexpected gains or losses.

It is common when the derivative is on a slightly different asset.

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