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FRM Part I · FRM Exam Part I · Using Futures for Hedging

A firm shorts futures to hedge an asset sale. Which change in basis (spot minus futures) benefits the short hedger?

A strengthening basis, where spot minus futures rises unexpectedly, benefits a short hedger. The price realized equals the initial futures price plus the final basis, so a higher final basis increases the price received. Weakening basis helps long hedgers instead.

  1. AThe basis strengthens (increases unexpectedly)Correct
  2. BThe basis weakens (decreases unexpectedly)
  3. CThe basis stays unchanged, which produces a gain
  4. DBasis changes never affect a short hedger

Explanation

Effective price = F1 + b2, where b2 is the final basis. A larger (strengthening) basis raises the price received by the short hedger. A weakening basis hurts the short hedger and helps a long hedger.

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