The danger of loss which is associated with an unexpected widening or narrowing in the basis between the time of taking or establishing a hedge position and the time it is terminated or set-off. The basis risk arises because of one or more the following reasons: First, the asset whose price is to be hedged may neither be the same as the asset underlying the futures contract, nor a full equivalent or substitute thereto. Second, the hedge may require closing out the futures contract prior to its delivery month. Third, the hedger may be uncertain about the exact date on which the asset will be purchased or sold.
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