On page 302 of Voume 5 it says: Any contract maturity different from 6 months implies basis risk (because the expected hedge period is 6 months). A bit earlier on the page, it says: but in the long run, the return on the hedged portfolio will differ from the portfolio return achieved in foreign currency by the interest rate differential, even with a hedge ratio of 1. Does that mean basis risk cannot be hedged in the long run and hence there is always some amount of basis risk present when conducting investment activities that are exposed to FOREX regardless of whether the contract maturity exactly matches the expected hedge period?
yes it is hard to hedge the basis risk as you don’t know what will be the future value of the asset.
Wasn’t there a sentence saying Basis risk can only be hedged perfectly if the maturity dates are the same? or was that for something else?
That is indeed what I was referring to. So would that imply that even if the maturities of the hedge and the expected hedge period are equivalent, there is no perfect hedge if let’s say it concerns a period of 2 years (instead of 3-6 months)?