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Basis risk exists when the hedging instrument A. is likely to increase in value over time....

Basis risk exists when the hedging instrument A. is likely to increase in value over time. C. has a high level of volatility. D. differs in value from the item being hedged.

I CHOOSE C

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Answer #1

ANSWER [ DIFFERS IN VALUE FROM THE ITEM [ OR VARIABLE ] BEING HEDGED

RISK IS HEDGING ARISES WHEN THERE IS NOT THE PERFECT HEDGING SOME TIMES THE RISK OCCUR DUE TO THE PRICE DIFFERENCE BETWEEN THE ASSETS PRICE AND HEDGING INSTRUMENT ; FOR EXAMPLE ; THE STOCK OF APPLE IS TRADING IN THE MARKET AT $ 45 NOW BUT THE PRICE OF FUTURE PRICE OF APPLE IS $46 THE DIFFERENCE IS $ 1 BETWEEN THE STOCK PRICE THE PRICE OF THE FUTURE IS BASIC RISK BECAUSE IF WE BUY APPLE STOCK $ 45 AND SELL FUTURE OF APPLE AT $46 THERE IS RISK OF $1 AS THERE IS NOT PERFECT 100% HEDGING

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