Why Does Basis Risk Occur

question 29

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.

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Definitions:

Psychological Disorder

A condition characterized by patterns of thought, feeling, or behavior that leads to distress, impaired functioning, or both.

Positive Symptoms

Symptoms that add abnormal behaviors or experiences, such as hallucinations or delusions, particularly in the context of conditions like schizophrenia.

Flat Affect

The display of little or no emotion—a common negative symptom of schizophrenia.

Hallucinations

Perceptions in a conscious and awake state in the absence of external stimuli which appear real, but are created by the brain.