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Hi sir,
For what I have observed in your notes, you used mid-point of spot rate in calculating basis risk. So my question is, if I used only one relevant spot rate rather than the mid-point, is it acceptable? will I be penalized and thus gain no mark?
Thank you, Sir.
Best regards,
Esther PangIt is acceptable – better is to use the mid-point, but the examiner himself has sometimes used just the relevant rate instead of the mid-point.
The marks are for proving you understand the idea and not for the exact numbers.
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hey sir i have seen your lectures that are great, but i am clueless what actually basis risk is.
i do know how to calculate it but don’t know what it is for and i have a question of KAT plc. i do have solution but there is something i dont understand.If the futures price moved by exactly the same amount as the spot rate, then it would be possible to hedge against the risk exactly (the gain or loss on the futures would exactly equal the gain or loss on the actual transaction).
However, futures and spot do not change by exactly the same amount (the difference between the two changes). This is the basis risk, and because of this it is not possible to have a perfect hedge. However we can predict the effect of the basis risk (by assuming it changes linearly). In practice there is no reason why it should change linearly, so even the prediction will not be perfect 🙂
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