13-23 Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary.

Question

Quizplus · Accepted Answer

Basis risk refers to the risk that the spread or difference between the pricing index (such as LIBOR or Treasury rates) and the cost of funds for a financial institution may fluctuate, leading to potential losses or reduced profits on loan commitments. Therefore, option A is correct, and basis risk does occur on a loan commitment.

13-23 Basis Risk Occurs on a Loan Commitment Because the Spread