Basis risk

CFA Level I Glossary

Basis risk is the risk that a hedge does not move one-for-one with the exposure you are protecting. It often arises because the futures underlier, maturity, or grade differs from the actual position. A perfect hedge would eliminate price risk; basis risk is what remains when the hedge is imperfect. People confuse basis risk with the idea that the hedge simply “failed,” when the residual mismatch is the normal leftover risk.

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