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

A trader holds a long spot position and is short futures. Which basis change benefits the hedger?

A short hedger benefits when the basis strengthens, meaning spot rises relative to futures. The effective price equals the initial futures price plus the final basis, so a larger final basis raises the price received. A weakening basis hurts the short hedger.

  1. AThe basis strengthens (spot rises relative to futures)Correct
  2. BThe basis weakens (spot falls relative to futures)
  3. CThe basis stays unchanged, giving a profit from convergence
  4. DBasis changes never affect a short hedger

Explanation

A short hedger's effective price equals initial futures plus final basis. A strengthening basis raises the final basis and so improves the outcome. A weakening basis hurts the short hedger and helps a long hedger.

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