Which of the following statements about the basis risk on futures is correct?
A) Basis risk is often completely eliminated by hedging.
B) Although the basis fluctuates over time, it can be precisely predicted.
C) The basis is approximately zero on the maturity date of the contract.
D) A hedge will reduce risk as long as the basis does not fluctuate.

Question

Quizplus · Accepted Answer

The basis, which is the difference between the spot price and the futures price, tends to converge to zero as the futures contract approaches its maturity date.

Which of the Following Statements About the Basis Risk on Futures