Basis risk
Asset-Backed Securities glossary · Asset Specific Nuances
Definition
The risk that two floating rates used in a transaction move differently (e.g., LIBOR vs. SOFR, or pool coupon vs. bond coupon).
Basis risk in plain English
Many deals collect one floating interest rate from borrowers and pay out a different floating rate to investors — and floating rates drift up and down over time. 'Basis risk' is the danger that these two rates don't move together, so the money coming in doesn't quite match the money going out, squeezing the deal. It's like being paid in one currency but owing rent in another: even if you earn 'the same amount,' a shift in the exchange rate can leave you short.
Learn these first
Practice Basis risk
Why are CLO tranches typically structured as floating-rate instruments?
Related Asset-Backed Securities terms
Asset-Backed Securities practice questions · Asset-Backed Securities flashcards · Asset-Backed Securities study guide