... speculative risk. A pure risk is a chance of loss or no loss, and a speculative risk is characterized as a chance of loss or gain. An example of pure risk is catastrophe risk, such as an earthquake, ... relaxed and the implications of basis risk are studied. 4.2 Implications of Basis Risk When the basis risk is present, ≠IL. It is speculative. Hedged firm now has a payoff as Π+ −kwwwa(z)I[max(zz),0] ... the swap price is less than the negative of basis risk, i.e., <−pLI, it would be preferred. 33 14 Basis risk is the difference between the payoff of weather derivatives and the actual...