Which one of the following is NOT an example of basis risk. Purchasing: a) an oil contract with delivery in multiple locations b) a commodity with a desired distant delivery with near term contracts c) a eurodollar contract, due to lack of commodity futures d) a commodity with a desired distant delivery with long term contracts Answer provided by Schweser is (d) My understanding is that basis risk is created when there is a mismatch in maturity of futures contract with the req’d delivery date of commodity (doesn’t matter which is shorter) or when delivery needed in multiple locations. Can someone clarify? - BN
Basis risk is the difference between the Futures price and the spot bulks out or closes too much or becomes negative… A) is incorrect as the basis of a contract for NYC delivery can has a different basis than the commodity price in LA B) is incorrect because spot rate shocks and changes in lease rates and convenience yields can result in a roll loss (and a potentially large one). C) Different assets considered here, should be obvious. D) If the dates of the futures contract and the delivery date are matched then there is no Basis risk (but there will be others).