Which risk involves the difference between a commodity and the price of a futures contract for that commodity?

Basis risk refers to the risk that the price of a commodity and the price of a futures contract for that commodity do not move in perfect correlation. It arises from the inherent differences that can exist between the spot price of a physical commodity and the price of its corresponding futures contract.

In the context of hedging, for instance, if a producer or consumer of a commodity enters into a futures contract to protect against price fluctuations, they may still experience a mismatch, or basis risk, if the local market price for the commodity diverges from the futures market price. This can occur due to various factors such as changes in supply and demand, transportation costs, or regional market conditions that impact the local pricing of the commodity.

Understanding basis risk is crucial for effective risk management in commodities trading, as it highlights the limitations of using futures contracts to fully hedge against price volatility in the physical market. This is why the correct answer emphasizes the importance of the relationship between the commodity price and its futures counterpart.