This introduces what is known as basis risk
, where the trigger index does not perfectly correlate with the underlying risk exposure, resulting in a situation where a policyholder suffers a loss but does not receive payment.
London: The issuance of covered bonds referencing the Sterling Overnight Index Average (SONIA) rate does not create material basis risk
for UK covered bonds programmes, Fitch Ratings says.
Epsilon Unconstrained Strategy ("EUS"), a 30-security strategy that leverages Epsilon's flagship statistical algorithm, is unconstrained from benchmarks or basis risk
The broadness of the index, however, creates basis risk
because industry aggregate losses are unlikely to fully map to losses experienced by the warranty's holder.
The purchase of index-linked alternative risk transfer instruments can lead to basis risk
, if the insurer's loss is not fully dependent on the index.
68% of respondents said reliance on asset managers for investment product design and basis risk
reduction has increased
"Until now, many of these market participants have been left to manage their documentation internally, but this may pose significant basis risk
: the complexity of derivatives documentation and the potentially huge exposures of these types of transactions necessitate the input of prudent, experienced and specifically trained experts," it said in a press release.
Alternatively, the most important disadvantage of the weather derivatives and the index insurance they most frequently advert to is the basis risk
. The cause of the production basis risk
is that individual yield fluctuations in general are not perfectly correlated with the relevant weather variable.
Patients who "overbreathe" on a sustained basis risk
chronic CO2 deficiencies that make them even more vulnerable to future attacks.
The result allows ceding companies to manage credit risk more efficiently while minimizing the company's basis risk
Bowers said basis risk
, which is offering rates between assets and liabilities at the same term point on the curve changed by different amounts, "can be a crucial oversight" by many financial institutions.
It also explains the organization of financial markets for energy, financial derivatives, basis risk
, speculation arbitrage, hedging, the relationship between the physical and financial prices, and emission trading in the US and the European Union.