Common use of Basis Risk Clause in Contracts

Basis Risk. Originates when an underlying asset and the method used to hedge that asset do not have perfectly correlated price movements. In grain markets, this is typically a result of physical ownership of grain, and a commodity derivative hedge on a futures exchange. Basis risk then often arises due to the physical grain and the hedging instrument having different characteristics i.e. quality, location, currency of value etc. CBH Grain manages basis risk using the same overarching principles by which it manages commodity price risk and foreign exchange risk. The key factor however, is to execute the physical sales strategy which involves systematically selling down the physical ownership of the Pool over time. At all times, the Pool will operate with the prescribed physical sales mandate, which is designed to reduce exposure to basis risk over time.