What Is the Primary Risk Introduced by a Mismatch between the Hedge Expiration and the Exposure Timeline?
The primary risk is basis risk. This occurs when the value of the asset being hedged and the value of the hedging instrument do not move in perfect correlation or their values diverge at the time the hedge needs to be unwound.
If the exposure lasts longer than the hedge, the hedger is unprotected for the remaining period.
