Correct answer of Mock exam Q49 says that the three major sources of hedging error are: 1) incorrect duration calculation 2) inaccurate projected basis value 3) inaccurate yield beta estimate What is basis value? I have not found it in index. Only remember basis risk. Thanks in advance.
Basis is the difference in the futures price and spot price. It only matters when the hedge is lifted. If you are lifting a hedge before its maturity you have to project what the basis will be at that time. If you are wrong you will not have hedged as efficiently as possible.
^agree basis value is like a ‘spread’ of future prices over spot or the other way around
I got it. Basis value is “basis” mentioned in schweser. Thank you.