Spread Risk

Spread risk is the exposure to financial loss caused by fluctuations in the difference between two related prices or rates. In commodities, it often refers to the variance between two grades of oil, contract months, or regional benchmarks.

For example, a trader holding a Brent-WTI spread position faces spread risk if the price differential widens or narrows unexpectedly, affecting potential profits. Spread risk also occurs in bond markets, interest rate swaps, and credit derivatives.

Managing spread risk involves monitoring market conditions, volatility, liquidity, and economic indicators. Hedging strategies using futures, swaps, or options can mitigate potential losses.

Understanding spread risk allows traders and risk managers to make informed portfolio adjustments, optimize hedging, and control exposure to market inefficiencies or unforeseen shocks.