Question

Which of the following decreases basis risk?

Greater similarity between the underlying asset of the futures contract and the hedger’s exposure

A decrease in correlation coefficient between the underlying asset of the futures contract and the hedger’s exposure

Hedge using the “stack and roll” of short-term futures contracts

increase in the time between the date when the futures contract is closed and its delivery month

Answer 1

Whenever there will be a greater similarity which is between the underlying asset of the future contract and the the hedger's exposures, it will mean that it will help in decreasing the basis risk to a large extent due to greater similarity between the underlying asset and the exposure.

All the other options will be leading to increase in basis risk.

Correct answer will be option (A)greater similarity between the underlying asset of the future contract and hedger's exposure.