Sign up  |  Log in

Basis Risk

Colin Cooper is in possession of a large quantity of wheat and expects prices to decline. Which of the following positions is most
appropriate for Cooper?

Buying hedge.
Short the basis.
Long hedge.
Long the basis.

Answer given is long  the basis

but i feel this is wrong as basis = spot - future and price to decline means spot is falling hence basis is reduced hence this will lead to loss for long basis i.e. short hedge.

i guess correct answer the short the basis or long futures and sell cash as price will decline and this will lead to profit for short the basis hedger.

Pls give you view.

FREE – Over 2 hours of calculations videos for Part I and Part II from Christian Cooper – Essential Exam Prep

Never seen such question and is pretty stupid, imo. And one cannot conclude that he is a long wheat futures contracts from your question  above. Maybe you have not cited well.

I do not ask for the trust nor give it to you.

He is long wheat so needs to be short futures. Then the price drop is hedged by the short except for a little basis risk.  Long wheat/short futures is called long the basis.  The farmer or holder of cash grain is hoping for a tightening basis which isn’t affected by absolute price.