// definition
Basis risk
Changes in the gap between an exposure and its hedge
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Short definition
The risk that the price gap between the commodity actually bought or sold and the benchmark used to hedge it changes during the hedge. Products, grades, delivery locations and dates may differ. Hedging crude oil can therefore leave part of a refined fuel’s cost exposed.
risk atlas
Knowledge map
Formula
commodity basis = physical price − futures price, in comparable units and currenciesRelated analyses
Primary sources
- CFTC: Basis and Basis RiskCash-futures price differences and changes between establishing and lifting a hedge.
- ECB: energy derivativesSection 3: price spreads between gas delivery points.