Definitions for

**"Basis risk"****Related Terms:**Market risk, Downside risk, Hedging, Price risk, Hedge, Hedge ratio, Basis trading, Speculator, Perfect hedge, Long hedge, Short the basis, Derivatives, Delta hedging, Derivative, Oversold, Cross hedge, Bear market, Index arbitrage, Speculation, Hedger, Correction, Overbought, Technical rally, Bull market, Delta hedge, Short hedge, Long the basis, Delta , Relative strength index, Bear spread, Implied volatility, Rally, Bullish, Bull, Index futures, Going long, Bear , Bearish, Rsi, Profit taking, Bull spread, Long position, Financial futures, Underlying, Trin, Long, Minimum price fluctuation, Commodity channel index, Tick, Volatility

Exposure of a transaction or portfolio to the differences in the price performance of the instruments in the portfolio. Also referred to as correlation risk, basis risk may also be used to specifically describe the risk that the rate or basis relationship between a transaction in one market, and a hedge of that transaction in another market in the same currency will change.

The basis for a particular contract may narrow or widen over a certain (short) period of time.

The magnitude to which valuations for derivative securities do not accurately reflect valuations for the underlying physical securities on which they are based. Investors engaged in index arbitrage often attempt to exploit basis risk.

The uncertainty as to whether the cash-futures spread will widen or narrow between the time a hedge position is implemented and liquidated.

The possibility of unexpected variation in basis and a resulting loss of expected revenue when a futures contract is liquidated and the commodity sold on the cash market.

The risk of a movement between two different interest rate profiles, for example, prime lending rate and US Treasury rates.

The risk associated with not being able to predict the basis accurately. Because futures and cash prices tend to move together over time, basis risk is usually less than price risk.

The risk that two instruments with an identical sensitivity to interest rates do not behave in an identical manner. For example, the AOFM's debt defeasance strategy consisted of overlaying the trend term deposit balance with interest rate swaps to receive fixed rates, matches against the excess of gross over net nominal debt. When swap rates and bond yields of similar terms did not move in unison the strategy was exposed to basis risk.

A method of measuring performance of hedges: the lower the basis risk the better the hedges performance

the exposure of a transaction or portfolio to differences in the price performance of the derivatives it contains and their hedges.

The risk that basis moves in an unexpected manner

the possibility that an imperfectly matched hedge could produce a loss, eg, a hedger has taken offsetting positions in two related markets but not perfectly matched markets such as using bank bill futures to hedge a position in two year bonds.

The risk of unexpected change in the relationship between futures and spot prices.

Is the risk in the basis time series. This can be influenced by many variable although the total impact is less than the exposure for a naked position. When a hedge is placed, price risk is transformed into basis risk. Basis risk is substantially less than price or inventory risk in terms of dollars.

basis risk is the risk that the value of a futures contract (or an over-the-counter hedge) will not move in line with that of the underlying exposure. Alternatively, it is the risk that the cash- futures spread will widen or narrow between the times at which a hedge position is implemented and liquidated. There are various types of basis risk. For example, a heating oil wholesaler selling its product in Baltimore will be exposed to basis risk if it hedges using New York Harbor heating oil futures contracts listed by Nymex. This is a â€˜locationalâ€(tm) basis risk. Other forms of basis risk include â€˜productâ€(tm) basis, arising from mismatches in type or quality of hedge and underlying (eg, hedging jet fuel with heating oil); and â€˜timeâ€(tm) or â€˜calendarâ€(tm) basis (eg, hedging an exposure to physical prices in December with a January futures contract).

1. The risk of a change in yield to maturity. 2. The risk of an unfavorable basis change resulting in a futures gain less than a cash market or a futures loss greater than a cash market gain.

The extent to which valuations for derivative securities do not accurately reflect valuations for the underlying physical securities on which they are based. Basis risk is sometimes exploited by investors engaged in index arbitrage.

The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for price risk.

extent to which the cash/futures differential might or will change before the corresponding hedge position is fixed or liquidated.

Risk from exposure to uncertain spreads.

Difference between a hedge’s actual underlying reference point and the needed fundamental hedge. E.g. the basis for the Nordpool market is the systems spot price. If, however, a power producer in the north of Sweden hedges his production (hedges his risk) by using system price based derivatives – he might encounter a basis risk. This is because there might be constraints in the transmission system – and hence the price he can sell his physical power at might not be the same as the systems price. (The system price might not be the same as the price in northern Sweden).

Refers to the risk of the underlying mortgage loans and offered certificates tied to different indices. It is the possibility of the certificate accruing interest at higher interest rates than the underlying mortgage loans. When the aggregate amount of interest on the certificates is greater than the interest on the collateral, the amount is known as the basis risk shortfall.

The magnitude to which valuations for derivative securities do not wholly reflect the valuations for their basis in underlying physical securities. Investors involved in index arbitrage often attempt to exploit basis risk.

The risk of unpredictable price movements of the basis before expiry of the futures contract.

The risk that the relationship between interest rate indices alters unfavorably.

The risk that the price of a hedge instrument does not move as expected relative to the price of the security being hedged.

An element of risk that exists when there is an imperfect correlation between 2 investments, and therefore creates a pricing difference.

(correlation risk) Risk that the value of a forward- or futures contract does not develop in line with the value of the commodity in which the physical position being hedged is held. There are different forms of basis risk: the local basis risk results from the fact that the futures contract utilized for hedging is (theoretically) delivered at another location; the product basis risk results from the fact that the quality of commodities differs; the time basis risk results from differences between the maturity of the futures contract and the physical position.

When hedging, the risk associated with incorrectly matching offsetting investments.

The risk associated with an unexpected widening or narrowing of basis between the time a hedge position is established and the time that it is lifted.

Risk from changes in spreads.

The basis for a particular product does not necessarily stay constant - changes in basis can occur for a variety of reasons. Such changes can cause either a profit or loss to be incurred by the holder of the product and thus constitute a risk. Basis risk can mean that a person using futures to hedge an underlying cash position cannot obtain a perfect hedge, where profits on one side of the hedge exactly offset losses on the other. See also Basis and Basis Trading.

Basis risk in finance is the risk associated with imperfect hedging using futures. It could arise because of the difference between the asset whose price is to be hedged and the asset underlying the derivative, or because of a mismatch between the expiration date of the future and the actual selling date of the asset.