Why Is Basis Risk Unavoidable, Even with a Perfect Hedge Ratio?
Basis risk is unavoidable because it is a function of the difference between the derivative price and the spot price, which is influenced by factors beyond the hedger's control, such as market microstructure, funding rates, and delivery logistics. Even with a perfect hedge ratio, these external factors can cause the basis to fluctuate unpredictably.
Glossar
Hedge Ratio
Calculation ⎊ The Hedge Ratio quantifies the necessary size of a derivative position required to offset the price risk inherent in an underlying asset or portfolio, representing the change in the derivative's price relative to the change in the underlying.
Perfect Hedge
Calibration ⎊ A perfect hedge, within cryptocurrency derivatives, represents a dynamic positioning strategy aiming for zero delta sensitivity to underlying asset price movements.