what is basis risk 
basis risk is the financial 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 understanding basis riskoffsetting 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 the treasury bill and the bond will not fluctuate identically to quantify the amount of the basis risk an investor simply needs to take the current market price of the asset being hedged and subtract the futures price of the contract for example if the price of oil is 55 per barrel and the future contract being used to hedge this position is priced at 54 98 the basis is 0 02 when large quantities of shares or contracts are involved in a trade the total dollar amount in gains or losses from basis risk can have a significant impact other forms of basis riskanother form of basis risk is known as locational basis risk this is seen in the commodities markets when a contract does not have the same delivery point as the commodity s seller needs for example a natural gas producer in louisiana has locational basis risk if it decides to hedge its price risk with contracts deliverable in colorado if the louisiana contracts are trading at 3 50 per one million british thermal units mmbtu and the colorado contracts are trading at 3 65 mmbtu the locational basis risk is 0 15 mmbtu product or quality basis risk arises when a contract of one product or quality is used to hedge another product or quality an often used example of this is jet fuel being hedged with crude oil or low sulfur diesel fuel because these contracts are far more liquid than derivatives on jet fuel itself companies making these trades are generally well aware of the product basis risk but willingly accept the risk instead of not hedging at all calendar basis risk arises when a company or investor hedges a position with a contract that does not expire on the same date as the position being hedged for example rbob gasoline futures on the new york mercantile exchange nymex expire on the last calendar day of the month prior to delivery thus a contract deliverable in may expires on april 30 though this discrepancy may only be for a short period of time basis risk still exists 