The risk that arises because the value of a futures contract will not be perfectly correlated with the firm's exposure is called ________.

Question

Quizplus · Accepted Answer

Basis risk arises because the value of the futures contract may not perfectly align with the firm's actual exposure. This can occur due to variations in the underlying asset, timing differences or delivery location, and other factors that impact the basis or difference between the futures price and the spot price. Commodity price risk refers to the potential fluctuations in the market value of the commodity itself, while liquidity risk relates to the ability to buy or sell the futures contract at a desirable price or timeframe. Speculation risk refers to the potential for losses due to investment or trading decisions based on inaccurate or incomplete information.

The Risk That Arises Because the Value of a Futures