Which one of the following statements regarding "basis" is true?
A) The basis is the difference between the futures price and the spot price.
B) The basis risk is borne by the hedger.
C) A short hedger suffers losses when the basis decreases.
D) The basis increases when the futures price increases by more than the spot price.
E) The basis is the difference between the futures price and the spot price, basis risk is borne by the hedger, and basis increases when the futures price increases by more than the spot price.

Question

Quizplus · Accepted Answer

The basis indeed is the difference between the futures price and the spot price. Basis risk, which is the risk that the basis will change unfavorably, is indeed borne by the hedger. Additionally, the basis does increase when the futures price increases by more than the spot price, as the basis is essentially the gap between these two prices.

Which One of the Following Statements Regarding "Basis" Is True