2011 Mock Exam, Q14

I could not understand the answer.

The satetement is “The return on a hedged stock will differ from the stock return achieved in foreign currency for the following reasons: foreign exchange transaction costs, stock price volatility, and the interest rate differential.”

But the answer talk about the basis risk. What’s the link between the two?

Basis risk - difference in movement in spot & underlying futures

Suppose you have hedged by taking position in futures. But then spot % movement should be equivalent to % movement in futures. Otherwise return on hedged stock will differ from stock return in local (foreign) currency