Basis Risk
Basis risk is the risk that the price of a hedging instrument does not move in lockstep with the price of the asset being hedged, due to differences such as timing, location, or quality. It arises from changes in the basis—the gap between the asset's spot price and the hedge instrument's price.
Example: A farmer hedges corn price risk with a futures contract; basis risk may arise if the local cash price diverges from the futures price due to harvest timing or regional factors.
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