Business, Legal & Accounting Glossary
Spread risk is risk (usually market risk or earnings risk) due to exposure to some spread. It often arises with a long-short position or with derivatives. A synonym for spread risk is basis risk.
Suppose a bank lends at prime and finances itself at Libor. It faces spread risk due to the possibility that the prime-Libor spread might narrow. A bond trader might hedge a long position in corporate bonds by shorting Treasury bonds. The hedge eliminates exposure to changes in Treasury yields, but the trader remains exposed to changes in the spread between corporate and Treasury yields. He too is taking spread risk. See the article Interest Rate Risk for more on basis risk in fixed income markets.
If futures are used to hedge a long or short position in an underlier, residual risk will remain due to the spread between the futures price and the underliers spot price. That spread is called the futures’ basis.
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This glossary post was last updated: 17th April, 2020 | 0 Views.