Basis risk refers to the potential mismatch between the price movements of a hedging instrument and the underlying asset being hedged. It arises when there is a lack of perfect correlation between the two, leading to the risk that the hedging instrument may not fully offset the price movements of the underlying asset, resulting in financial losses. Basis risk is commonly encountered in derivative contracts and hedging strategies.

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What is basis risk?

Anonymous

∙ 14y ago

Updated: 10/24/2023

Basis risk in finance is the risk associated with imperfect hedging using futures. So

Basis = Spot price of hedged asset - Futures price of contract

Wiki User

∙ 14y ago

What else can I help you with?

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