Question

1. One advantage of hedging with options is that there is no basis risk. (True or False)

2. The time value of an option goes to zero as the expiration date approaches. (True or False)

Answer 1

1. The statement is false.

In hedging,Basis Risk is a financial risk that does not Experience price changes in opposite directions from each other.This Correlation leads to Excess losses in the Hedging strategy which adds the Basis Risk

2. The statement is true.

As the value of an option comes closer to the Expiration date, the value of an option goes to zero as the time value and option value are related.This is because of the less time cummulative volatility. Less volatility leads to less option value.