Basis risk occurs because it is generally impossible to

Question

Quizplus · Accepted Answer

Basis risk is the risk that the hedging instrument may not match the terms of the asset or liability being hedged, resulting in imperfect hedging. It is difficult to exactly match the terms of the hedging instrument with the terms of the underlying asset or liability, leading to basis risk. While it may be difficult to predict interest rate changes, it is not the only cause of basis risk. Likewise, finding negatively correlated asset prices would not necessarily eliminate basis risk.

Basis Risk Occurs Because It Is Generally Impossible to