What is basis risk?

In financial terms, basis risk means the risk associated with hedging. It happens because of the asset that is to be hedged's price and the difference of the asset serving as a hedge. There is a risk that the two investments could experience price changes in vastly different directions.

Where have you heard about basis risk?

Locational risk is another form of basis risk. This happens more in the market of commodities, when a contract’s delivery point is not in line with that needed by the seller. These risks will usually be calculated when offsetting investments in a hedging strategy.

What you need to know about basis risk.

When there is a difference in price between hedge, futures or relatives and the cash or spot price of the assets hedged, at any given point in time, the risks associated with those differences are called basis risks. In order to calculate the amount of the basis risk, investors will need to look at the futures price of a contract and subtract that from the current market price of the asset being hedged.