Imperfect correlations between the futures price and the underlying spot price decrease the effectiveness of a hedged position. When the hedging horizon is long relative to the maturity of the futures used in the hedging strategy, the hedge has to be rolled prior to expiration. As maturity of the hedging instrument approaches, the hedger must close out the existing position and replace it with another contract with a later maturity. Rolling the hedge forward exposes the hedger to the basis risk of the new position each time the hedge is rolled. |
