Futures market transactions are used to reduce risk.Risk may not be totally offset if:
A)the two instruments have different maturities.
B)payoff schedules of the two instruments are different.
C)the volatility of the two instruments are different.
D)the price movements are not perfectly correlated.
E)All of the above.

Question

Quizplus · Accepted Answer

All the mentioned factors can contribute to imperfect hedging, meaning that the risk may not be fully offset. Different maturities, payoff schedules, volatility, and lack of perfect correlation can all lead to basis risk, where the hedge does not perfectly offset the risk.

Futures Market Transactions Are Used to Reduce Risk