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.

---

Definitions:

Actual Information

Factual data or evidence that is true and accurate, without alteration or distortion.

Raw Materials Quantity Variance

The difference between the actual quantity of raw materials used in production and the estimated quantity expected to be used, measured in terms of cost.

Direct Materials Purchases Variance

This measures the difference between the actual cost of direct materials purchased and the expected (or standard) cost of those materials.

Actual Results

The real outcomes or data achieved, as opposed to forecasts or projections.