Economics · Financial Risk Hedging
In financial risk management, the term 'Basis Risk' refers to the risk that:
- 1The company's finance team has made mathematical errors in calculating total risk exposure.
- 2The counterparty to a forward derivative contract defaults on their financial obligation.
- 3The price of the hedging instrument does not move in perfect synchronization with the price of the underlying asset being hedged.✓
- 4The underlying asset value of the firm drops to absolute zero.
Correct answer
The price of the hedging instrument does not move in perfect synchronization with the price of the underlying asset being hedged.
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