Go Back   The Finance Forums > Finance forums > Homework



Homework Get help with your finance related homework.

Reply
 
Thread Tools
  #1  
Old 12-05-2012, 12:04 PM
theslowblitz theslowblitz is offline
Junior Member
 
Join Date: Dec 2012
Posts: 1
Default I don't understand basis risk (SOLVED)

SOLVED - I just realised the reason that it doesn't match is because of imperfect hedging. Sorry 'bout that.

In a youtube video, it was explained that:
Total cost of a transaction (of asset and hedge) = cost of asset on spot market (in the future) + change in futures price.

It seems to me that a six-month future being priced now and a six-month future priced in the future are two different things. If they are the same asset, then the price of the futures (in the future) should be the same as the spot price in the future, which doesn't seem to be the case.

An explanation would be greatly appreciated.

Last edited by theslowblitz; 12-05-2012 at 12:31 PM. Reason: Solved the problem
Reply With Quote

Old Sponsors
  #2  
Old 02-07-2013, 05:57 AM
Donovan Donovan is offline
Junior Member
 
Join Date: Jan 2013
Posts: 17
Default Re: I don't understand basis risk (SOLVED)

Quote:
Originally Posted by theslowblitz View Post
SOLVED - I just realised the reason that it doesn't match is because of imperfect hedging. Sorry 'bout that.

In a youtube video, it was explained that:
Total cost of a transaction (of asset and hedge) = cost of asset on spot market (in the future) + change in futures price.

It seems to me that a six-month future being priced now and a six-month future priced in the future are two different things. If they are the same asset, then the price of the futures (in the future) should be the same as the spot price in the future, which doesn't seem to be the case.

An explanation would be greatly appreciated.
hmm where is video?
Reply With Quote

  #3  
Old 03-17-2013, 02:31 AM
abc201879456 abc201879456 is offline
Junior Member
 
Join Date: Mar 2013
Posts: 22
Default Re: I don't understand basis risk

These are 2 different questions:

1.futures forwards can be 6m ahead 12 month 36 months ahead
2.basis risk in simple terms are Offsetting vehicles are generally similar in structure to the investments being hedged, but they are still different enough to cause concern. For example, in the attempt to hedge against a two-year bond with the purchase of Treasury bill futures, there is a risk that the Treasury bill and the bond will not fluctuate identically.

So as the maturity risk due to various factors like liquidity ,Risk assumptions basis risk increases so 6m futures 6m from now or a 12 months future will have a higher basis risk than a 3m months futures


Reply With Quote

  #4  
Old 04-04-2013, 01:25 AM
richardberry134 richardberry134 is offline
Junior Member
 
Join Date: Mar 2013
Posts: 13
Default Re: I don't understand basis risk

It occurs when futures and cash prices fail to move in tandem. Depends on this relation between basis at the begin and basis at the end, certain not avoidable risk scenarios may arise.
Reply With Quote

Reply

Thread Tools

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off



» Boards




All times are GMT -4. The time now is 09:46 PM.


Powered by vBulletin® Version 3.8.5
Copyright ©2000 - 2018, Jelsoft Enterprises Ltd.