# Basis Risk ⎊ Area ⎊ Resource 6

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## What is the Basis of Basis Risk?

Basis risk represents the potential for loss arising from imperfect correlation between a hedged asset and the hedging instrument. In cryptocurrency derivatives, this risk manifests when the price movement of a futures contract or perpetual swap does not perfectly track the spot price of the underlying digital asset. This discrepancy can occur due to factors such as funding rate dynamics, market fragmentation, or differences in liquidity across exchanges.

## What is the Hedge of Basis Risk?

When a trader uses a derivative to hedge a spot position, basis risk introduces uncertainty into the effectiveness of that hedge. The hedge may not fully offset losses in the spot market if the basis widens unexpectedly. Managing this risk requires careful selection of hedging instruments and continuous monitoring of the price relationship between the derivative and the underlying asset.

## What is the Consequence of Basis Risk?

The consequence of basis risk is a potential reduction in expected profits or an increase in unexpected losses for a hedged portfolio. For options traders, basis risk can complicate delta hedging strategies, as the futures contract used for hedging may not accurately reflect the price changes required to maintain a neutral position. This necessitates a more sophisticated approach to risk management and portfolio rebalancing.


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## [Real-Time Volatility Oracles](https://term.greeks.live/term/real-time-volatility-oracles/)

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**Original URL:** https://term.greeks.live/area/basis-risk/resource/6/