Basis Risk

The gap between local cash prices and the futures hedge, the residual risk hedgers keep.

Overview

Basis equals cash minus futures, set by freight, quality differentials, local supply and demand, and delivery mechanics. A country elevator hedging Chicago wheat owns the local basis, which can blow out when rivers freeze or rail fails, and cross hatches such as jet fuel hedged with gasoil leave product spread risk. Basis converges at delivery points but not elsewhere, and basis trading, elevators bidding grain against the board, is a business in itself. Location differential contracts and options overlays manage it, and historical basis ranges by month are the hedger map. Most hedge blowups are basis surprises rather than outright price misses.