Which of the following statements is correct?
A) Hedging a long bond position with payer's swap involves basis risk
B) Hedging the credit risk of an asset swap package with a credit default swap has no basis risk
C) Basis risk is a result only of maturity mismatches
D) Basis risk is a result only of duration mismatches.

Question

Quizplus · Accepted Answer

Hedging a long bond position with a payer's swap involves basis risk because the swap and the bond may not respond identically to changes in interest rates or other market conditions, leading to imperfect hedging.

Which of the Following Statements Is Correct