Hedging Using Futures Contracts all these issues relate to the basis risk Basis risk spot price of asset to be hedged- futures price of contract used If the hedged asset is the same as the asset underlying the futures contract, the basis risk is 0 on the expiration day Before the expiration day the basis risk could be positive or negative (see the picture) Charles cao10 Charles Cao Hedging Using Futures Contracts ◼ All these issues relate to the basis risk ◼ Basis risk = spot price of asset to be hedged - futures price of contract used ◼ If the hedged asset is the same as the asset underlying the futures contract, the basis risk is 0 on the expiration day ◼ Before the expiration day, the basis risk could be positive or negative (see the picture)