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   Basis Risk
   















 

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Basis Risk

(1) The possibility of loss from imperfectly matched risk offsetting positions in two related but not identical markets. Examples might be the risk of loss from using a Deutsche mark position to offset Swiss franc exposure or using an intermediate instrument to hedge long-term interest rate exposures. (2) Exposure to loss from a maturity mismatch caused, for example, by a shift or change in the shape of the yield curve. (3) The variability of return stemming from possible changes in the price basis, or spread between two rates or indexes. Also called Tracking Error, Correlation Risk in some applications. See Basis (2).

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