One of the problems of hedging with a futures contract compared with a forward contract is:
A) basis risk.
B) default risk.
C) settlement risk.
D) interest rate risk.

Question

Quizplus · Accepted Answer

The problem of hedging with a futures contract compared with a forward contract is basis risk, which is the risk that the cash price and futures price may not move in the same direction, leading to losses in hedging. Forward contracts are customizable, whereas futures contracts have standardized terms, which can lead to basis risk. Default risk, settlement risk, and interest rate risk apply to both forward and futures contracts.

One of the Problems of Hedging with a Futures Contract