Which of the following statements is true?
A)The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called value risk.
B)The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called basis risk.
C)The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called gap risk.
D)The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called fundamental risk.

Question

Quizplus · Accepted Answer

The statement describes basis risk, which is the risk that the hedging instrument does not perfectly offset the exposure being hedged. Value risk refers to changes in the market value of an asset or portfolio. Gap risk is the risk that prices may ‘gap’ causing a sudden change in price, and fundamental risk refers to risks associated with an issuer’s financial and operating characteristics.

Which of the Following Statements Is True