You'll sell later (short hedge)
A farmer, a miner or a fund that owns bonds and sells futures against them.
- Basis strengthensyou get more
- Basis weakensyou get less
What Is Basis Risk? Meaning, Formula and Examples
Basis risk is the chance that a hedge and the thing it protects don't move by the same amount. The basis is the gap between them, usually the spot price minus the futures price. A hedge locks in today's futures price plus whatever the basis is on the day you close it, and nobody knows that last number in advance.
In January 2026, US Gulf Coast jet fuel cost 45 cents a gallon more than Brent crude. By September the gap was $1.66. An airline that hedged September's fuel with Brent in January still paid $1.21 a gallon more than it planned. Bond investors meet the same thing in credit spreads and currency hedges.
The formula
BasisSpot price−Futures price
What a hedge locks inFutures price when you hedge+Basis when you close
For the airline: $1.585 for Brent in January plus a $1.659 basis in September is $3.244 a gallon, not the $2.031 jet fuel cost when it hedged.
Jet fuel over Brent, Sep 2026$1.66 a gallonthe widest monthly gap in EIA's data since 2006, up from $0.45 in January
Corporate bond, 2 to 4 April 2025−$8,685on $1 million hedged with Treasuries: rates fell, the credit spread rose
Bonds vs credit swaps, 23 Mar 2020−175 bpinvestment-grade CDS-bond basis, per the New York Fed
Basis risk calculator: what your hedge really locks in
Enter the spot and futures prices when you open the hedge and when you close it. The calculator shows the basis on both days, what you end up paying or receiving, and how much of that came from the basis moving.
You will
When you hedgeWhen you close
Spot pricewhat you trade
Futures priceyour hedge
Basisspot − futures
–
–
Quantitygallons
Price you end up paying–
- Paid on the spot market
- –
- Gain or loss on the hedge
- –
- Basis change
- –
- Effect of the basis on your total
- –
One futures unit per unit hedged, before fees and margin. "Planned" is the price you'd lock in if the basis stayed where it was when you hedged.
When the basis strengthens or weakens
A basis "strengthens" when spot minus futures goes up and "weakens" when it goes down, whatever its sign. Which one hurts depends on your side of the hedge.
You'll buy later (long hedge)
An airline buying fuel, a food maker buying grain, an importer buying a currency.
- Basis strengthensyou pay more
- Basis weakensyou pay less
Types of basis risk, with real examples
Basis risk comes from any difference between what you own and what you hedge with: the place, the product, the date or the exact thing that gets delivered. Bonds add two of their own.
Location basis
Your local price moves apart from the price where the contract delivers, because of transport costs and local supply.
Low water on the Mississippi in October 2022: Illinois corn went from $1.61 a bushel under the Gulf price on 30 September to $2.28 under it on 7 October (USDA).
Product basis (cross hedge)
There's no liquid contract for what you buy, so you hedge with a relative: jet fuel with crude oil or heating oil.
Gulf Coast jet fuel over Brent: $0.45 a gallon in January 2026, $1.66 in September (EIA monthly averages). See the chart.
Timing basis
You close the hedge before the contract expires, or roll it from one month to the next, and the months move apart.
On 20 April 2020 the May WTI contract settled at −$37.63 a barrel while June Brent closed at +$25.57: a different month and a different delivery point.
Delivery basis
Treasury futures can be settled with any bond from a basket. The seller picks the cheapest to deliver, and which bond that is can change.
Hedging one specific Treasury with futures leaves you exposed to the gap between your bond and the cheapest-to-deliver one.
Credit spread basis
A corporate bond hedged with Treasuries keeps its credit spread. When spreads widen, the hedge doesn't help.
2 to 4 April 2025: 5-year Treasury yields −0.23 points, 3 to 5 year corporate spreads +0.20. Worked example.
Currency basis
Hedging a foreign bond back into your currency costs the gap in short-term rates plus the cross-currency basis, and the basis can jump.
Mid-March 2020: borrowing dollars through FX swaps cost 85 bp more than dollar LIBOR against euros and 150 bp more against yen (BIS).
Basis risk example: jet fuel and Brent crude in 2026
Airlines often hedge fuel with crude oil because crude futures trade in far bigger volume than jet fuel. That works while jet fuel and crude move together. In 2026 they didn't.
US Gulf Coast jet fuel
Brent crude, per gallon
The basis
Sep 2026: jet fuel $4.39, Brent $2.73, basis $1.66
Monthly averages of EIA daily spot prices, on days both were quoted, in dollars per gallon, January 2019 to September 2026. Brent is converted from barrels at 42 gallons. Hover or tap the chart to read a month.
- 1January: hedge$2.031 jet, $1.585 BrentThe airline buys Brent for September. If the 45-cent gap holds, it has locked in about $2.03 a gallon.
- 2September: buy the fuel$4.388 a gallonJet fuel more than doubled. Brent rose too, but only to $2.729 a gallon.
- 3Close the hedge+$1.144 a gallonThe Brent position pays the rise in Brent, $2.729 minus $1.585.
- 4Net cost$3.244, not $2.031$1.21 a gallon more than planned, all of it from the basis widening. On 1 million gallons, $1.21 million.
To keep the example readable, the hedge is a Brent position bought at January's average spot price and closed at September's. A real hedge uses futures for a set month, which adds timing basis on top. The same thing happened in 2022, when the gap passed $1.40 a gallon in April and October.
Basis risk for bond investors
A bond's yield is a government yield plus a spread. Hedges usually cover the government part, so the spread is where bond investors meet basis risk. Here's a two-day example from April 2025, priced with the same bond engine that values bonds in AllInvestView.
A 5-year corporate bond and a Treasury hedge
$1,000,000 face of a 5-year corporate bond with a 4.79% coupon, yielding 4.79% on 2 April 2025, hedged by selling $975,000 of a 5-year Treasury, the amount whose value moves the same as the bond's for a small change in rates.
| Close | Treasury | Spread | Bond yield |
|---|---|---|---|
| 2 Apr 2025 | 3.95% | 0.84% | 4.79% |
| 4 Apr 2025 | 3.72% | 1.04% | 4.76% |
| Change, points | −0.23 | +0.20 | −0.03 |
What each side made
The bond's yield barely moved, so its price barely moved. The Treasury rallied, so the short hedge lost.
Corporate bondprice 100.25 to 100.38 per 100+$1,294
Short Treasury hedgeprice 100.17 to 101.20 per 100−$9,979
Hedged positionthe 0.20 spread rise, unhedged−$8,685
The hedge did its job on rates and still lost money, because the risk that moved was the credit spread. Unhedged, the bond made $1,294 over the two days. Hedged, the position lost $8,685. The Treasury yield is FRED's 5-year constant maturity series and the spread is the ICE BofA 3-5 Year US Corporate Index option-adjusted spread.
The CDS-bond basis compares a bond's credit spread with the price of insuring the same credit. Bonds offered 1.75 points more than the swaps on 23 March 2020, and the New York Fed puts the 2007 to 2009 low at −274 bp. Investors already holding bonds hedged with CDS lost as the basis went more negative.
Hedge funds that own Treasuries and sell futures against them earn the small gap between the two. In March 2020 that gap moved against them, and the Fed estimates these positions shrank by about $117 billion in a month, while the Fed itself bought about $1.6 trillion of Treasuries from March to June.
Daiwa put the three-month cost of hedging dollars back into yen at just under 6% a year on 13 December 2023. A 10-year Treasury yielded 4.04% that day, so hedged into yen at that cost its yield turned negative. The hedge cost is the gap in short rates plus the cross-currency basis.
See the spread and the rate risk in your own bonds
The worked example works because the bond's risk splits in two: the government yield and the spread on top. AllInvestView shows both for every bond you hold, across every broker you add.
Bond report · Risk
Your spread over government, bond by bond
Every bond gets its spread over the government curve in its currency, grouped by size, with your widest spreads and largest issuers listed. That's the part a Treasury hedge leaves open.
- Yield to maturity, duration, convexity and accrued interest on each bond
- Government curves for the US, Canada, the euro area and the UK
- Up to 5 bonds on the free plan
AllInvestView
Bond report · Risk
What a rate move does to the whole book
Slide rates up or down in steps of 0.1 point and see the change in value, the bonds that move most and what you still get back at maturity. That's the part a Treasury hedge covers, so you can size one.
- Change in value for moves from −3 to +3 points
- Average duration and the value of a 0.01 point move
- Bonds alongside your stocks, ETFs and options in one dashboard
AllInvestView
Basis risk vs spread risk vs tracking error
These three get mixed up constantly. They aren't the same thing.
| Concept | What it measures | Where you see it |
|---|---|---|
| Basis risk | What's left when your hedge or pricing reference doesn't move exactly like what you hold | Spot vs futures, cross hedges, CDS-bond basis, cross-currency basis, cheapest-to-deliver switches |
| Spread risk | A credit, sovereign or sector spread widening or tightening against its benchmark | Daily bond prices, credit indices, sovereign spreads such as Italy over Germany |
| Tracking error | How much a fund's return has varied around its benchmark's, as a standard deviation | ETF and mutual fund factsheets, performance reports |
The mental model: spread risk is the level of credit premium moving. Basis risk is whether your reference and your holding move together. Tracking error is the record of how well they did. A position can show low tracking error for years and still carry real basis risk, because calm markets never tested it.
How to reduce basis risk
You can't remove it unless you hedge the exact thing, in the exact place, to the exact date. You can make it smaller.
Hedge with the closest contract
Same product, same delivery region, same grade where one exists. Jet fuel hedged with heating oil or diesel usually tracks better than jet fuel hedged with crude, because both are refined products.
Match the dates
A futures contract meets the price of its own underlying at delivery. Pick one that expires just after you need to buy or sell, and close it near expiry, to cut the timing gap. A cross hedge still keeps its product or location gap.
Size it with a hedge ratio
When the hedge isn't the same thing, don't assume one for one. The minimum-variance ratio is
h* = ρ × σS ÷ σF: the correlation of price changes over the hedge period times the spot's volatility over the futures' volatility. With ρ = 0.9, σS = 4% and σF = 5%, you'd hedge 72% of the value. It can also come out above 100%.Look at the basis before you rely on it
Chart the gap over the past years, as above. A basis that went from just under zero in May 2020 to $1.66 in September 2026 is a different hedge from one that moved a few cents. For bonds, watch your spread over government next to your duration.
Every broker in one place
Know the spread and the rate risk in every bond you own
Track bonds next to your stocks, ETFs and options, with yield, duration, spread over government and what a rate move would do, across every account you add.
Spread over government per bond
Rate move slider for the whole book
Free plan with up to 5 bonds
Questions about basis risk
What is basis risk in simple terms?
It's the chance that your hedge and the thing you're protecting don't move by the same amount. A hedge on a different product, place or date can pay off less than the loss it was bought for, or cost more than the gain it gives up. The gap left over is basis risk.
What is the formula for basis?
Basis = spot (cash) price minus futures price, in the same units. A hedge that you open and close one for one locks in the futures price when you open it plus the basis when you close it. You know the first part on day one. The second is the risk.
What does it mean when the basis strengthens or weakens?
The basis strengthens when spot minus futures goes up (less negative or more positive) and weakens when it goes down. A stronger basis helps someone who will sell the product and hedged by selling futures. A weaker basis helps someone who will buy it and hedged by buying futures.
Can basis risk be eliminated?
Only when the hedge is the exact product, in the exact place, held to the exact delivery date, and even then delivery terms matter. In practice you shrink it: use the closest contract, close the hedge near expiry, size it with a hedge ratio, and look at how the basis behaved in the past before you rely on it.
What is basis risk in insurance?
In parametric or index insurance the payout depends on an index, such as rainfall or wind speed, rather than the loss you actually suffer. Basis risk is the gap between the two. The index can pay less than your loss, or pay when you lost nothing.
Does a Treasury hedge protect a corporate bond?
It protects the interest rate part only. Between 2 and 4 April 2025 the 5-year Treasury yield fell 0.23 points while corporate spreads rose 0.20, so a corporate bond barely moved but a short Treasury hedge lost money. The credit spread is the part a Treasury hedge leaves open.
What is cross-currency basis?
It's the extra cost, beyond the gap in interest rates, of borrowing one currency against another through FX swaps. It matters to anyone holding currency-hedged foreign bonds. In mid-March 2020 the BIS measured dollars costing 85 basis points more than dollar LIBOR when borrowed against euros, and 150 basis points more against yen.
Sources
Checked on 24 October 2026.
- CME Group, Self-Study Guide to Hedging with Grain and Oilseed Futures and Options, basis as cash minus futures, strengthening and weakening
- John Hull, Fundamentals of Futures and Options Markets, chapter 3, the price a hedge locks in and the minimum-variance hedge ratio
- EIA, US Gulf Coast kerosene-type jet fuel spot price, daily, and Europe Brent spot price, daily, through 20 October 2026
- FRED, 5-year Treasury constant maturity rate and ICE BofA 3-5 Year US Corporate Index option-adjusted spread, 2 and 4 April 2025
- Federal Reserve Bank of New York, The Primary and Secondary Market Corporate Credit Facilities, 26 May 2020, CDS-bond basis
- Federal Reserve, Decomposing Hedge Funds' US Treasury Exposures, 22 June 2026, cash-futures basis positions
- Lorie Logan, New York Fed, 23 October 2020, Treasury purchases from March to June 2020
- BIS Bulletin 15, US dollar funding markets during the Covid-19 crisis, FX swap dollar funding costs in March 2020
- Daiwa Securities, Hedging costs in 2024, 13 December 2023, and FRED, 10-year Treasury rate
- USDA AMS, Grain Transportation Report, 13 October 2022, Illinois minus Gulf corn price spread
- EIA, Short-Term Energy Outlook, May 2020, and ICE, WTI and Brent on 20 April 2020
- CME Group, Understanding Treasury Futures, delivery baskets and cheapest to deliver
- World Bank, Risk Modeling for Appraising Named Peril Index Insurance Products, basis risk in index insurance
The corporate bond example is priced with AllInvestView's bond engine: semi-annual coupons, 30/360, yields as shown, and a hedge sized so both bonds change by the same amount for a 0.01 point move. Prices are per 100 of face value, and the results are price changes only, before coupon accrual, financing and trading costs. The calculator's farmer and steady-basis examples use round illustrative prices.