if it decreases, should we buy spot securities and sell futures??
could someone please give a brief summary of basis risk? i don’t quite understand… wouldn’t basis risk (or the effects thereof) create arbitrage opportunities?
I don’t think we could answer the question generically, the strategy would depend on which way the basis moves. Here is some info on basis risk as I understand it… Basis = spot price - future price used to hedge Basis risk = std dev (basis) When both the asset & the future used to hedge it move together, basis risk is low. When the two don’t move together, the basis risk increases and the hedge is not effective. This can result in either a gain or loss in the total p/f. If someone wants to capitalize on basis risk, it is possible via arbitrage. Basis risk has been quoted in a variety of topics in the curriculum - fixed income hedging, commodity hedging & currency hedging. I believe this will be an important topic for the exam. - BN