Newb question here, but can anyone provide a brief description of basis risk? Basis risk is mentioned as one of the disadvantages to some insurance linked securities, but I don't totally know what that means.
The best I can come up with is this AIR article which says basis risk can be understood as the difference between the actual losses experienced by the sponsor and the payment the sponsor receives.
Particularly in this situation, I'm looking at CAT Risk Swaps where a disadvantage is that these can create more exposure to basis risk than some other types of contracts. What's going here? The text example is with a CA EQ with a Japan EQ.
Cheers,
Gareth Keenan
The best I can come up with is this AIR article which says basis risk can be understood as the difference between the actual losses experienced by the sponsor and the payment the sponsor receives.
Particularly in this situation, I'm looking at CAT Risk Swaps where a disadvantage is that these can create more exposure to basis risk than some other types of contracts. What's going here? The text example is with a CA EQ with a Japan EQ.
Cheers,
Gareth Keenan
Basis Risk refresher
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