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:

Maroon Communities

Groups of runaway slaves who established independent settlements, often in remote areas, resisting re-enslavement and developing their own autonomous communities in the Americas.

Assimilate

The process by which individuals or groups adopt the culture, customs, and attitudes of another group, losing their original identity.

Natural Reproduction

The biological process by which new individual organisms are produced from their "parents," naturally occurring without human intervention.

Abolitionist Policies

Initiatives aimed at ending the practice of slavery and the slave trade.