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What Is the Term ‘Basis Risk’ in the Context of Hedging?

Risk that the spot price of the asset and the derivative price used to hedge it do not move perfectly together.
Greeks.Live17.11.25

What Is the Term ‘Basis Risk’ in the Context of Hedging?

Basis risk is the risk that the price of the asset being hedged (the spot price) and the price of the instrument used to hedge it (the derivative price) do not move in perfect correlation. This imperfect correlation means the hedge may not fully offset the loss, leaving the hedger exposed to some residual risk.

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