Basis risk in freight hedging
The four sources of basis on a freight hedge: basket composition, the standard vessel, the averaging window and the derived-value offset, with the arithmetic.
Basis risk is the exposure a hedge leaves behind, and on a freight hedge it comes from four identifiable places rather than from market noise. Basket composition, where a multi-route timecharter average is not the single trip being performed. The standard vessel, where the index prescribes a defined design and the real ship is not it. The averaging window, where the contract settles on a monthly mean while the fixture is struck on a day. And the derived-value offset, where a subtraction series carries a published fixed differential against the assessed one.
Only the fourth can be computed exactly in advance. The full article will work each source through with numbers in both directions, because basis is a variance rather than a cost, and will cover how a desk measures and reports it against realised earnings.