Which one of the following statements regarding "basis" is not true?
A) The basis is the difference between the futures price and the spot price.
B) The basis risk is borne by the hedger.
C) A short hedger suffers losses when the basis decreases.
D) The basis increases when the futures price increases by more than the spot price.

Question

Quizplus · Accepted Answer

The basis is defined as the difference between the futures price and the spot price. Basis risk refers to the risk that the basis will change unfavorably. A short hedger actually benefits when the basis decreases because they are selling futures contracts and hoping to buy at a lower spot price later. Therefore, statement C is not true as it inaccurately suggests a short hedger suffers losses when the basis decreases.

Which One of the Following Statements Regarding "Basis" Is Not