What Is the Impact of a Low-Liquidity Futures Contract on Basis Risk?

A low-liquidity futures contract generally increases basis risk. Low liquidity means the contract may have wide bid-ask spreads and the price may not accurately reflect the fair market value.

Trades can be executed at prices that deviate significantly from the theoretical value, making the futures price an unreliable anchor for the spot price. This can lead to unpredictable convergence and a higher chance that the basis will not close to zero at expiration.