Spread risk refers to the potential for losses arising from adverse changes in price relationships between related instruments, even when individual instrument risks are hedged. This risk affects portfolio strategies that depend on stable correlations or spread relationships. Spread risk can emerge during market stress when normal relationships break down.

Spread risk management involves understanding correlation stability, basis relationships, and factors that might cause spread widening or narrowing. Diversification across different spread types and monitoring of relationship changes help manage this risk. Understanding spread risk helps optimize relative value strategies and hedge effectiveness.

Real-world example: A refinery hedged with crude oil futures faces spread risk when gasoline crack spreads widen unexpectedly due to refinery outages, causing losses on refined product margins despite crude oil price protection.