Risk Terms

Basis Risk

Definition

What is Basis Risk?

The risk that a hedge and the exposure it is intended to offset do not move closely enough.

Example in practice

A company hedges fuel costs with crude futures, but local diesel prices move differently.

Keep learning

The possibility of loss because broad market prices or rates move against an investment.

The possibility that a borrower or issuer will fail to make promised payments or suffer a downgrade.

The possibility that changing market interest rates will reduce an investment's value or income appeal.

A day on which relevant financial institutions and markets are open for normal processing.

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