"Basis" risk may arise in a hedging situation if
A) The expiry date of the futures contract and the date on which the hedge is unwound do not coincide.
B) The futures contract used for hedging relates to a commodity that is somewhat different than that being hedged.
C) A disconnect between spot and futures markets causes the failure of the convergence of futures to spot at expiry of the futures contract.
D) All of the above.

Question

Quizplus · Accepted Answer

All three scenarios mentioned in options A, B, and C can lead to basis risk in a hedging situation. Basis risk arises when the hedging instrument (in this case, the futures contract) does not perfectly match the underlying asset being hedged, leading to potential losses if the values of the two diverge.

"Basis" Risk May Arise in a Hedging Situation If