A Company Is Considering Using Futures Contracts to Hedge an Identified

question 22

Multiple Choice

A company is considering using futures contracts to hedge an identified interest rate exposure on its debt facilities.However, it is concerned about the impact of basis risk.All of the following statements regarding basis risk are correct, except:

• A)basis risk is the difference between prices in the physical market and the price of the relevant futures market contract.
• B)the existence of basis risk removes the opportunity for a perfect borrowing hedge.
• C)initial basis will be evident while the market is of the view that physical market prices will remain stable.
• D)final basis will exist where a futures contract is used to hedge a risk associated with a different physical market product.

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Definitions:

Pain Impulses

Neural signals that convey the sensation of pain from the peripheral nervous system to the central nervous system.

Facial Expression

The movement of the facial muscles to convey emotions and communicate nonverbally.

Facial Nerve

The seventh cranial nerve that controls the muscles of facial expression, taste sensations from the anterior two-thirds of the tongue, and the secretion of saliva and tears.

Vagus

Referring to the tenth cranial nerve (vagus nerve), which is part of the parasympathetic nervous system and controls functions of the heart, lungs, and digestive tract.