Basis risk refers to the risk
A)associated with anticipated price movements.
B)associated with unanticipated price movements.
C)of default on the futures contract.
D)from a change in the spread between the rate on the hedged instrument and the rate on the instrument actually traded.

Question

Quizplus · Accepted Answer

Basis risk refers to the risk from a change in the spread between the rate on the hedged instrument and the rate on the instrument actually traded. It arises due to the imperfect correlation between the underlying asset and the futures contract being used for hedging. Basis risk can lead to losses, as the hedged position may not perfectly offset the underlying asset's price fluctuations.

Basis Risk Refers to the Risk