22-65 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 different markets with different demand and supply functions.
D)Answers B and C only.
E)Answers A and C only.

Question

Quizplus · Accepted Answer

Basis risk occurs because 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. Additionally, spot and futures contracts are traded in different markets with different demand and supply functions, which can contribute to basis risk. The daily marking-to-market process (answer B) is a way to manage the risk of futures positions, but it does not eliminate basis risk. Answer D is incorrect because answer B is not a valid reason for basis risk to occur.

22-65 Why Does Basis Risk Occur