• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Basis Risk/Cross Hedging Risk

J

JamesCarlyle

Member
Can anyone explain the difference between basis risk and cross hedging risk? Every time I try to come up with an example of basis risk it seems to be due to cross hedging risk i.e. actual assets differing from those underlying the future.

Thanks
 
Hi James,

Cross-hedging risk is a particular type of basis risk.

Basis risk = risk that the prices of the asset we want to hedge and the asset we are using to hedge it do not move in the same way.

This could happen for 3 different reasons:
1) the asset we are using to hedge isn't a precise match.
eg hedging a UK technology portfolio with FTSE 100 futures
hedging the price of cherry tomatoes with standard tomato futures
(this is cross-hedging risk)

Even if the asset is a precise match, this doesn't mean we escape basis risk
2) We might need to close out early at a time when the basis is not in a favourable position to us
3) It might be unclear when we are going to sell our tomatoes or liquidate our technology portfolio

John
 
Back
Top