Basis risk financial definition of basis risk
Also found in: Wikipedia
Unexpected changes in the basis between the placing and the lifting of a hedge. Basis risk is in excess of convergence.
The possibility that a commodity contract's basis will move against the investor. For example, an investor may buy a spot contract and sell short a higher-priced futures contract on the same commodity in expectation of a narrowing of the basis but may find that the basis widens instead.
References in periodicals archive
Two newly engendered risks, basis risk
(the risk created by the fact that the return from the financial derivative is a function of weather at a prespecified geographical location which may not be identical to the location of the firm) and credit risk (the risk that the counterparty to the derivative contract may not perform), are analyzed in this article.
In this case, basis risk
influences the spot price and the futures price is unaffected.
What you've done is take some basis risk
between the type of portfolio that he or she runs and the index return you're paying away.