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.Which of the following statements regarding basis risk is incorrect?
A) Basis is the difference between price 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.

Question

Quizplus · Accepted Answer

Basis risk arises from the difference between the futures price and the spot price, not from the stability of physical market prices. Initial basis can change due to various factors, including changes in supply and demand, not just stability expectations.

A Company Is Considering Using Futures Contracts to Hedge an Identified