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due to the variables or characteristics that affect the difference between the futures contract and the underlying "cash" position. It arises because of the difference between the price of the asset to be hedged and the price of the asset serving as the hedge before expiration, namely b = S - F.
143:(c) Location (leading to Transportation Costs) arising due to the difference in the location of the asset being hedged and the asset serving as the hedge, and which typically includes a premium to cover the risk these transportation costs may rise, causing a negative impact on the hedger.
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Barring idiosyncratic influence by the other aspects to be enumerated just below, by the time of expiration this simple difference will be eliminated by arbitrage. The other aspects that give rise to basis risk include
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of the asset and the futures price do not converge on the expiration date of the future. The amount by which the two quantities differ measures the value of the basis risk. That is,
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Over-the-counter (OTC) derivatives can help minimize basis risk by creating a perfect hedge. This is because OTC derivatives can be tailored to fit the exact risk needs of a hedger.
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137:(a) Quality (grade) arising when the hedge in place has a different grade which is not perfectly correlated with the basis;
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contract (NDF): the NDF fixing might vary substantially from the actual available spot rate on the market on fixing date.
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Treasury bill future being hedged by two year Bond, there lies the risk of not fluctuating as desired.
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Understanding
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Basis risk is not to be confused with another type of risk known as
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Basis = Spot price of hedged asset - Futures price of contract.
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Federal
Reserve Bank of Chicago, Financial Markets Group
267:"HEDGING WITH GENERALIZED BASIS RISK: Empirical Results"
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46:. Unsourced material may be challenged and removed.
180:Foreign currency exchange rate (FX) hedge using a
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302:. Federal Reserve Bank of Chicago. 2014.
106:Learn how and when to remove this message
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44:adding citations to reliable sources
173:Some examples of basis risks are:
1031:. You can help Knowledge (XXG) by
1027:This finance-related article is a
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634:Conditional Value-at-Risk (CVaR)
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309:from the original on 2014-07-20
248:from the original on 2017-05-14
31:needs additional citations for
953:Strategic financial management
756:Asset and liability management
1:
151:Under these conditions, the
531:Operational risk management
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703:Proportional hazards model
654:Interest rate immunization
129:associated with imperfect
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372:financial risk management
203:Financial risk management
649:First-hitting-time model
614:Arbitrage pricing theory
958:Stress test (financial)
664:Modern portfolio theory
182:non-deliverable forward
208:List of finance topics
996:Investment management
898:Investment management
624:Replicating portfolio
400:Sovereign credit risk
1001:Mathematical finance
933:Risk-return spectrum
923:Mathematical finance
878:Fundamental analysis
811:Exchange traded fund
395:Consumer credit risk
40:improve this article
991:Financial economics
948:Statistical finance
714:Value-at-Risk (VaR)
619:Black–Scholes model
459:Holding period risk
968:Structured product
963:Structured finance
943:Speculative attack
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592:Non-financial risk
489:Interest rate risk
415:Concentration risk
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57: –
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51:Find sources:
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29:This article
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1033:expanding it
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928:Moral hazard
913:Risk of ruin
689:Sharpe ratio
551:Country risk
512:Deposit risk
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410:Default risk
311:. Retrieved
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277:. Retrieved
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55:"Basis risk"
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38:Please help
33:verification
30:
1078:Market risk
978:Toxic asset
938:Speculation
871:social work
856:engineering
684:Risk parity
669:Omega ratio
582:Profit risk
469:Equity risk
447:Volume risk
435:Market risk
387:Credit risk
274:sta.uwi.edu
213:Uncertainty
1072:Categories
561:Legal risk
541:Model risk
455:Shape risk
451:Basis risk
379:Categories
313:2014-07-29
252:2017-05-15
219:References
163:price risk
153:spot price
147:Definition
119:Basis risk
66:newspapers
908:Risk pool
821:Financial
831:analysis
766:Bad debt
644:Drawdown
606:Modeling
304:Archived
246:Archived
192:See also
169:Examples
96:May 2015
846:betting
836:analyst
826:adviser
479:FX risk
131:hedging
125:is the
123:finance
80:scholar
888:Hazard
639:Copula
506:(e.g.
445:(e.g.
279:15 May
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893:Hedge
851:crime
841:asset
674:RAROC
570:Other
307:(PDF)
300:(PDF)
270:(PDF)
224:Notes
87:JSTOR
73:books
1029:stub
903:Risk
866:risk
370:and
281:2017
127:risk
59:news
861:law
806:ESG
121:in
42:by
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