Treat basis risk as its own exposure
Explain why a futures hedge does not remove local basis risk in a physical commodity position.
The move: say what the hedge does not hedge. Basis risk appears when the instrument used for protection does not move one-for-one with the physical exposure. A crude cargo priced off dated Brent, a regional gas basis, a soybean elevator bid, and an LME-linked physical premium all carry local behavior that can diverge from the screen hedge. The professional habit is to split the position into legs. The futures leg may be hedged. The physical differential, freight, quality, and timing legs may not be. This is why a "fully hedged" physical position can still leak P&L. Use a residual-exposure line.…
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