Basis Risk example

[brisby55]

Would this be an pseudo-accurate example of basis risk?
So basis risk would arise when I enter into a futures contract with a foreign currency. Then the interest rate on either the domestic or foreign currency changes, thus changing the new futures rate. Because of this, when I go to transact out of my initial futures contract, I may make/lose money because the futures rate has changed based on an interest rate changing.
Am I thinking about this the right way? Thanks

 

[1recho]

Almost. Basis risk means “change in futures price not equal to change in spot price”. In your example, a change in interest rates will move both prices. The (basis) risk is that they won’t move by the same amount.