An investor in a hedge position is no longer exposed to the absolute price movement of the underlying asset, but the investor is still exposed to basis risk.

Question

Quizplus · Accepted Answer

A hedge position is taken to eliminate or reduce the exposure to the absolute price movement of the underlying asset. However, the investor is still exposed to basis risk, which arises from the imperfect correlation between the underlying asset and the hedging instrument used. This means that even though the hedge may be effective in reducing price risk, it may not completely eliminate it due to basis risk.

An Investor in a Hedge Position Is No Longer Exposed