We had basis risk discussed in fixed income, commodity futures and also currency management I know that any time we lift the hedge prior to the fuures maturity date we get basis risk I don’t exactly undersrstand why and how. Somebody PLEASE explain:)
Futur price and Spot price doesn’t exactly moves in locked-steps.
Remember, at expiration there is no basis risk.
atpr Wrote: ------------------------------------------------------- > We had basis risk discussed in fixed income, > commodity futures and also currency management > > I know that any time we lift the hedge prior to > the fuures maturity date we get basis risk > > I don’t exactly undersrstand why and how. > Somebody PLEASE explain:) In all these situations where you need to hedge ( either interest rate risk, currency risk, …) you rarely find a future contract that perfectly matches your asset (same risk factor exposures), so you have to use the best match available, which means when you lift your hedge, the future will have moved differently from your asset ( because they’re not exactly the same), and that’s your basis risk.
Basis risk THINK futures price does not equal spot price before expiration of the futures contract. At expiration, the prices converge.
If the F = S*e^[blah]*t, the futures move in lock step with the spot…
thank you!