Glossary term
Basis Risk
The risk that a hedge and the position it protects do not move together perfectly; relevant for any cross-asset hedge.
Basis Risk is the risk that a hedge and the underlying position it is meant to protect do not move in perfect lockstep, leaving residual exposure. It arises whenever the hedging instrument differs from the asset being hedged — a different index, maturity, or contract. Basis risk is a central consideration in cross-asset hedging, where an imperfect proxy is often the only liquid option. See Money Temperature 101.