Why Does Basis Risk Occur

question 24

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 different markets with different demand and supply functions.
• D)None of these.
• E)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, and spot and futures contracts are traded in different markets with different demand and supply functions.

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Definitions:

Clayton Act

A U.S. antitrust law aimed at promoting fair competition for the benefit of consumers, preventing mergers and acquisitions that significantly reduce market competition.

Hart-Scott-Rodino Antitrust Improvement Act

A federal law that requires companies to file premerger notifications and undergo a review period before completing certain mergers, acquisitions, or transfers of securities.

FTC

The Federal Trade Commission, a U.S. agency responsible for consumer protection and maintaining competition.

Clayton Act

A U.S. antitrust law, enacted in 1914, aimed at prohibiting certain actions that lead to anti-competitiveness, such as price discrimination, exclusive dealings, and mergers that substantially lessen competition.