Which of the following increases basis risk?

Question

BlackTom AI · Accepted Answer

Question: Which of the following increases basis risk?

Observed options available:
- Option b: 'Dissimilarity between the underlying asset of the futures contract and the hedger’s exposure'
- There is an indication of 'cross out' as another entry, but no additional answer options are provided.

Analysis of Option b:
- The concept of basis risk arises from the imperfect hedge between a position and its hedging instrument. When the futures contract's underlying asset diverges from the hedged exposure, the relationship between the futures price and the hedged asset becomes less predictable, increasing basis risk. Dissimilarity in the underlying asset means movements in the futures price may not align well with the movements in the hedged exposure, which directly elevates basis risk.

Why this aligns with the theory:
- Basis risk is fundamentally about imperfect hedges due to differences in asset characteristics, contract specifications, or timing mismatches. A greater disparity between the hedged asset and the futures underlying reduces hedge effectiveness, which is exactly what this option describes.

Notes on the absence of other options:
- The provided data shows only one explicit option (b) and a stray 'cross out' indication, with an empty list for answer options. Because other potential choices are not visible, we cannot assess their truthfulness or falsehood. In a typical multiple-choice setting, a complete set of options is necessary to compare and contrast.

Implications of the missing alternatives:
- Without the full list, we cannot confirm whether any other statements might also increase or fail to increase basis risk. In general, any option that suggests closer alignment between the futures contract and the hedged exposure would likely reduce basis risk, while options describing differences in asset characteristics, timing, liquidity, or contract specifications would typically increase it.

Which of the following increases basis risk?

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类似问题

What reflects the degree to which the rate on the option's underlying asset moves relative to the spot rate on the asset or liability that is being hedged?

The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is true?

Which of the following increases basis risk?

The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is true?

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