Basis risk

Basis risk usually means the risk of an unfavourable change in the relationship between the price of a derivative and the market value of an underlying asset or liability being hedged.

For example resulting in a smaller profit being enjoyed on a hedging derivative, than the loss suffered on the underlying exposure.

Good hedge design therefore seeks to eliminate or minimise basis risk in the hedged position, so far as practicable.

See also

• Basis
• Hedge effectiveness
• Hedging