Basis Risk

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DEFINITION of 'Basis Risk'

The risk that offsetting investments in a hedging strategy will not experience price changes in entirely opposite directions from each other. This imperfect correlation between the two investments creates the potential for excess gains or losses in a hedging strategy, thus adding risk to the position.

INVESTOPEDIA EXPLAINS 'Basis Risk'

Offsetting vehicles are generally similar in structure to the investments being hedged, but they are still different enough to cause concern. For example, in the attempt to hedge against a two-year bond with the purchase of Treasury bill futures, there is a risk that the Treasury bill and the bond will not fluctuate identically.

RELATED TERMS
  1. Portfolio

    A grouping of financial assets such as stocks, bonds and cash ...
  2. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  3. Offset

    1. To liquidate a futures position by entering an equivalent, ...
  4. Futures

    A financial contract obligating the buyer to purchase an asset ...
  5. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with ...
  6. Risk

    The chance that an investment's actual return will be different ...
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