Baran

4、Which of the following is TRUE concerning basis risk? In a hedge using futures contracts:

A) basis risk of the hedged security is replaced with price risk.
 
B) basis risk is eliminated but price risk still exists.
 
C) both basis risk and price risk are eliminated.
 
D) price risk of the hedged security is replaced with basis risk. 
 

 

Baran

The correct answer is A 

basis = spot price of asset being hedged ? futures price of contract used in hedge:

$15.0 ? $18.0 = ?$3.0.

Baran

3、Which of the following is closest to the correct value for the basis associated with a spot position valued at $15 per unit and a futures contract with a value of $18 per unit?

A) –$3.0.
 
B) $5.0.
 
C) $3.0.
 
D) $2.0. 
 

 

Baran

The correct answer is C

 

Basis is defined as the difference between the spot price and the futures price. Weakening of the basis occurs when the futures price increases relatively faster than the spot price

Baran

2、A weakening of the basis is a consequence of the:

A) spot price increasing faster than the futures price over time.
 
B) spot price moving according to hyper-arithmetic Brownian motion.
 
C) futures price increasing faster than the spot price over time.
 
D) futures price moving according to hyper-arithmetic Brownian motion. 
 

 

Baran

The correct answer is A

 

 

No Answer Available