Question

You are short a future and you wish to make delivery. The cash and futures market are flat (equal in price to each other). When during the delivery period should you deliver the commodity? Why?

Answer 1

If the cash and futures markets are equal in price to each other, it means that the basis risk does not exist and the hedge is 100% effective throughout the life of the futures contract. Basis risk is the risk that the difference between cash and futures price will widen or narrow between the times at which a hedge position is liquidated. Since the cash and futures market are flat, there is no such risk and the delivery can be made at any time during thedelivery period with a same payoff amount.