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.

---

Definitions:

Otoliths

Small calcium carbonate crystals in the inner ear that, along with hair cells, help to detect gravity and linear accelerations, contributing to balance and spatial orientation.

Macula

A specialized region in the center of the retina responsible for sharp, detailed central vision.

Static Equilibrium

A state where an object is at rest and the sum of all forces and torques acting on it is zero, resulting in no movement.

Dynamic Equilibrium

A state of balance between continuing processes, often referring to the balance of substances in a chemical reaction.