The risk that arises because the value of the futures contract will not be perfectly correlated with the firm's exposure is called:
A)commodity price risk.
B)basis risk.
C)liquidity risk.
D)speculation risk.
E)margin risk.

Question

Quizplus · Accepted Answer

Basis risk arises because the futures contract may not perfectly align with the firm's exposure, such as differences in delivery locations or quality of the underlying asset. This can result in losses for the firm if the futures price and the actual price of the asset do not move in the same direction. The other choices are not relevant to this specific type of risk.

The Risk That Arises Because the Value of the Futures