Why does basis risk occur?
A)Changes in the spot asset's price are not perfectly correlated with changes in the price of the asset delivered under a forward or futures contract.
B)The daily marking-to-market process enables an FI manager to close out a futures position by taking an exactly offsetting position.
C)Spot and futures contracts are traded in the same market,and they have the same demand and supply functions.
D)Due to illiquid markets,the equilibrium spot and futures contracts are often mispriced.

Question

Quizplus · Accepted Answer

Basis risk occurs because changes in the spot price of an asset are not perfectly correlated with changes in the price of the asset delivered under a forward or futures contract. This can lead to a mismatch between the hedging instrument and the underlying asset, resulting in basis risk.

Why Does Basis Risk Occur