Which of the following increases basis risk?
A. A large difference between the futures prices when the hedge is put in place and when it is closed out
B. Dissimilarity between the underlying asset of the futures contract and the hedger's exposure
C. A reduction in the time between the date when the futures contract is closed and its delivery month
D. None of the above
B
Basis is the difference between spot and futures at the time the hedge is closed out. This increases as the time between the date when the futures contract is put in place and the delivery month increases. (C is not therefore correct). It also increases as the asset underlying the futures contract becomes more different from the asset being hedged. (B is therefore correct.)
You might also like to view...
A conventional cash flow pattern associated with capital investment projects consists of an initial ________
A) outflow followed by a broken cash series B) inflow followed by a broken series of outlay C) outflow followed by a series of inflows D) outflow followed by a series of outflows
The most commonly quoted currency exchange is that between the U.S. dollar and the European euro. For example, a quotation of EUR/USD 1.2174. The euro is the base currency and the dollar the price currency
Indicate whether the statement is true or false.