Basis Risk
Short definition
Basis risk is the hedge instrument and the hedged item not moving one-for-one in opposite directions. Tenor, grade, pair or fixing mismatch leaves an open amount under “we are hedged”.
Detailed explanation
Examples: a TLREF swap versus the loan formula, a Brent hedge versus the actual product, EUR invoices versus USD debt, mismatched tenors. If correlation is not 1, residual openness grows in the stress year.
Hedge-accounting effectiveness tests put a number on basis; economically the 13-week cash still misses.
Why it matters for the CFO
A wrongly fixed IRS can show a swap loss while the loan rate has not fallen.
How to read it
Basis = physical/loan price − hedge price. Volatile basis makes a 100 hedge ratio meaningless.
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Definitions are educational. They are not investment, credit or tax advice.