Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary.

Question

Quizplus · Accepted Answer

Basis risk refers to the risk that arises when the spread between the pricing index and the cost of funds changes, causing the lender to potentially earn a different net interest margin than expected. This can happen on a loan commitment (a promise to lend money at a future date) if the spread moves between the time of commitment and the time the loan is actually made.

Basis Risk Occurs on a Loan Commitment Because the Spread