Which of the Following Statements About the Basis Risk on Futures

question 40

Multiple Choice

Which of the following statements about the basis risk on futures is correct?

• A) Basis risk is often completely eliminated by hedging.
• B) Although the basis fluctuates over time, it can be precisely predicted.
• C) The basis is approximately zero on the maturity date of the contract.
• D) A hedge will reduce risk as long as the basis does not fluctuate.

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Definitions:

Perpetual Inventory System

An inventory system in which a detailed inventory record is maintained, recording each purchase and sale during the accounting period.

Periodic Inventory System

A periodic inventory system is an accounting method where inventory levels and cost of goods sold are determined at specific periods, such as monthly or annually, through a physical count.

Cost of Goods Sold

Cost of Goods Sold (COGS) represents the direct costs attributable to the production of goods sold by a company, including material and labor costs.

Stockholders' Equity

The residual interest in the assets of a corporation that remains after deducting its liabilities, representing ownership equity.