Skip to content

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

Which statement about basis risk in a futures hedge is most accurate?

Basis risk comes from uncertainty about the spot minus futures price when the hedge is closed. It can arise when the hedged asset differs from the futures underlying or when the timing of the transaction is uncertain. Neither a later expiry nor a hedge ratio of one eliminates it.

  1. ABasis risk disappears when the hedge is placed in a contract month that expires well after the hedge ends
  2. BBasis risk arises because the spot price minus the futures price at hedge close is uncertain, and it may stem from asset mismatch or timing mismatchCorrect
  3. CBasis risk occurs only when the hedger uses an asset identical to the underlying
  4. DBasis risk is eliminated by always choosing a hedge ratio of one

Explanation

Basis is spot minus futures; its value when the hedge is lifted is uncertain, creating basis risk. It arises from differences between the hedged asset and the futures underlying or from uncertainty about when the asset is bought or sold. Choosing a later expiry does not remove it, and a ratio of one does not either.

Did you get it right without looking?

One question tells you little. A timed set on Using Futures for Hedging shows your real accuracy, how long you take and where you lose marks.

Practise Using Futures for HedgingFree diagnostic mock

More Using Futures for Hedging questions