What is basis risk?Basis Risk
The risk left after hedging because the asset and the hedging instrument don't move perfectly together.
Learn “basis risk” in an animated lesson
- Futures BasicsHedgers and Speculators
Selling the same wheat future, a farmer with wheat is "buying insurance" while a trader without wheat is "placing a bet". The basis decides how precisely a hedge locks in the price.
- Hedging StrategiesCross Hedging: Using a Related Instrument
An airline wants to hedge jet fuel, but there's no good jet fuel futures contract. It has to borrow the closest-priced instrument instead.
- Hedging StrategiesHedge Ratio and Basis Risk
Spot and futures don't move in lockstep. How much should you hedge? The optimal ratio depends on correlation and volatility.
Related terms
See how “basis risk” works for yourself with an animation you can drag and play.
Go to “Hedgers and Speculators”