What is Basis Risk?
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1. Context
In this short video from FRM Part 1 curriculum, we take a look at a very important risk that you’ll be exposed to if you hedge using futures – basis risk. We define what the basis is, (in the ideal case) it’s property of converging to zero at maturity / delivery date and finally, explore the direction of exposure to basis as an entity using a long or short futures hedge. The details of the reading in which this topic appears are given below:
| Area | Financial Markets and Products |
| Reading | Hedging Strategies using Futures |
| Reference | John C. Hull, Chapter 3. Hedging Strategies Using Futures In Options, Futures, and Other Derivatives, 10th Edition, (New York: Pearson, 2017). |