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

Question

Quizplus · Accepted Answer

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.)

Which of the Following Increases Basis Risk