Basis Risk

Basis Risk
The risk that offsetting investments in a hedging strategy will not experience price changes in entirely opposite directions from each other. This imperfect correlation between the two investments creates the potential for excess gains or losses in a hedging strategy, thus adding risk to the position.

Offsetting vehicles are generally similar in structure to the investments being hedged, but they are still different enough to cause concern. For example, in the attempt to hedge against a two-year bond with the purchase of Treasury bill futures, there is a risk that the Treasury bill and the bond will not fluctuate identically.

Investment dictionary. . 2012.

Look at other dictionaries:

  • Basis risk — in finance is the risk associated with imperfect hedging using futures. It could arise because of the difference between the asset whose price is to be hedged and the asset underlying the derivative, or because of a mismatch between the… …   Wikipedia

  • basis risk — The risk to a holder of financial instruments that a change in prevailing interest rates will not affect the prices of or yields on similar instruments in exactly equal amounts. For example, an increase in prevailing interest rates might raise 3… …   Financial and business terms

  • Basis risk — The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for price risk. The New York Times Financial Glossary * * *    The risk that the price of a future will vary from the price of the underlying cash… …   Financial and business terms

  • Basis risk —   Is the risk of a movement between two different interest rate profiles, for example, LIBOR and US Treasury rates. See also Risk..., Foreign exchange risk, Interest rate risk, Liquidity risk and Country risk …   International financial encyclopaedia

  • basis risk — Fin the risk that price variations in the cash or futures market will diminish revenue when a futures contract is liquidated, or the risk that changes in interest rates will affect repricing interest bearing liabilities …   The ultimate business dictionary

  • Zero Basis Risk Swap - ZEBRA — A swap agreement between a municipality and a financial intermediary. Also known as a perfect swap or actual rate swap . The municipality pays a fixed rate of interest to the financial intermediary and receives a floating rate of interest in… …   Investment dictionary

  • Basis swap — A basis swap is an interest rate swap which involves the exchange of two floating rate financial instruments. A floating floating interest rate swap under which the floating rate payments is referenced to different bases. Usage of basis swaps for …   Wikipedia

  • risk — (1) Noun The possibility of loss. (2) Noun The uncertainty of whether events, expected or otherwise, will have an adverse impact. In this context, the adverse impact is usually a quantity of return ( income) or value at risk. (3) Noun the… …   Financial and business terms

  • Risk — Typically defined as the standard deviation of the return on total investment. Degree of uncertainty of return on an asset. The New York Times Financial Glossary * * * ▪ I. risk risk 1 [rɪsk] noun 1. [countable, uncountable] the possibility that… …   Financial and business terms

  • risk — In insurance law, the danger or hazard of a loss of the property insured; the casualty contemplated in a contract of insurance; the degree of hazard; a specified contingency or peril; and, colloquially, the specific house, factory, ship, etc.,… …   Black's law dictionary

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.