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 the same market, and they have the same demand and supply functions.
D)Due to illiquid markets, the equilibrium spot and futures contracts are often mispriced.
E)None of the options.

Question

Quizplus · Accepted Answer

Basis risk occurs because 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. This can result in a difference between the actual price paid or received and the price that was anticipated.

Why Does Basis Risk Occur