Assume a U.S. savings institution funds its fixed-rate mortgages by attracting short-term deposits. If it engages in an interest rate swap, but the index on the swap does not move in perfecttandem with its cost of deposits, this reflects

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This reflects basis risk, which is the risk that the index on the swap does not move in perfect tandem with the institution's cost of funds. Basis risk arises from differences in the financial instruments used to hedge against interest rate risk, which may not perfectly match the underlying assets or liabilities being hedged. Sovereign risk and credit risk are unrelated to this specific situation.