“I looked at basis risk last year, and just couldn’t get my head around it,” said one European credit analyst. It seems he is not alone. Banks are having difficulty getting to grips with the issue too.

Basis risk measures the possibility that hedges do not always move in an equal and opposite direction to the underlying asset. When there is variance in how the prices move, the risk may no longer be offset and a bank's books can be exposed to potential losses.