Why Does Basis Risk Occur

question 62

Multiple Choice

Why does basis risk occur?

• A)Changes in the spot asset's price are not perfectly correlated with changes in the price of the asset delivered under a forward or futures contract.
• B)The daily marking-to-market process enables an FI manager to close out a futures position by taking an exactly offsetting position.
• C)Spot and futures contracts are traded in the same market, and they have the same demand and supply functions.
• D)Due to illiquid markets, the equilibrium spot and futures contracts are often mispriced.
• E)None of the options.

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Definitions:

Corpus Callosum

A thick band of nerve fibers that divides the cerebral cortex lobes into left and right hemispheres, facilitating communication between the two sides of the brain.

Insula

A region of the brain's cerebral cortex, situated deep within the lateral sulcus, involved in consciousness, emotion, and regulating the body's homeostasis.

Intermediate Mass

In the context of the thalamus, it's the part that connects the two lobes of the thalamus at their medial surfaces.

Cerebellum

A part of the brain that regulates motor movements, balance, and coordination.