Basis risk occurs because it is generally impossible to

Question

Quizplus · Accepted Answer

Basis risk arises when the hedging instrument does not perfectly match the terms of the asset or liability being hedged, leading to some degree of uncertainty in the effectiveness of the hedge. While it is true that it is generally impossible to predict interest rate changes with complete accuracy, this is not the primary driver of basis risk. Similarly, finding negatively correlated asset prices would help to diversify risk, but it does not directly address basis risk.

Basis Risk Occurs Because It Is Generally Impossible to