Why Does Basis Risk Occur

question 46

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)Answers B and C only.
• E)Answers A and C only.

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Definitions:

Straight-Line Method

A method of allocating an asset's cost evenly over its useful life for purposes of depreciation.

Gain or Loss

Represents the difference between the selling price of an asset and its original purchase price, indicating a profit or a loss.

Discarded

Items or materials that have been thrown away or deemed as no longer useful or needed.

Accumulated Depreciation

The total amount of depreciation expense that has been recorded against a fixed asset over its useful life to date.