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.
Glossar
Unpredictable Convergence
Event ⎊ Unpredictable convergence describes a market event where the prices of two or more seemingly disparate assets or derivatives unexpectedly align or move in tandem.
Futures Contract
Leverage ⎊ Futures contracts in cryptocurrency represent agreements to buy or sell an underlying asset at a predetermined price on a future date, functioning as a derivative instrument that allows for amplified exposure without immediate asset ownership.
Wide Bid-Ask Spreads
Liquidity ⎊ ⎊ Wide bid-ask spreads in cryptocurrency, options, and derivatives markets reflect diminished liquidity, indicating fewer participants willing to transact at prevailing prices.