When there is a mismatch between a firm's risk exposure and the underlying futures contract used for hedging,it referred to as basis risk.

Question

Quizplus · Accepted Answer

Basis risk occurs when there is a discrepancy between a firm's actual risk exposure and the underlying hedging instrument used to manage the risk. This could be due to differences in the timing, delivery terms, or other factors that affect the relationship between the underlying asset and the futures contract being used to hedge it. As a result, basis risk can result in unexpected losses or gains that offset the intended benefits of hedging.

When There Is a Mismatch Between a Firm's Risk Exposure