Why Is Basis Risk Generally Lower in Physically-Settled Futures?
Basis risk is lower in physically-settled futures because the requirement to deliver the actual underlying asset ensures a stronger convergence between the spot price and the futures price at expiration. The physical delivery mechanism forces the two prices to meet, effectively eliminating the risk that the cash settlement price might deviate from the spot market.
Glossar
Basis Risk
Exposure ⎊ The core of basis risk within cryptocurrency derivatives, particularly options, stems from the imperfect correlation between the price movements of the underlying asset and its derivative contract.
Physical Delivery Mechanism
Settlement ⎊ Physical Delivery Mechanisms within cryptocurrency derivatives, options, and financial derivatives represent the concrete transfer of an underlying asset ⎊ be it a digital token, commodity, or financial instrument ⎊ from seller to buyer upon contract exercise or expiration.