Chapter 12

Question 1

Basis risk

Answer 1

The basis of a futures contract is defined as the difference between the futures price of the contract used to hedge (F0) and the spot price of the asset to be hedged (S0).

Question 2

Basis risk

Answer 2

Future price and the spot price
Volatility
Imbalances
Changes
Assumptions

Question 3

Basis risk may arise if

Answer 3

The future used to hedge the asset is not based on the exact underlying asset that is to be hedged

If the investor is uncertain about when the asset must be bought or sold

If the hedge requires the futures contract must be closed out before the expiration date