20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for September 2025 exams.
Get your discount code >>

Armstrong Group (Sept/Dec 2015)

This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.

Viewing 2 posts - 1 through 2 (of 2 total)

Author
Posts
August 31, 2017 at 10:26 am #404609
cys94
Member
- Topics: 30
- Replies: 29
Dear John,
At (b),the question state that it assume the company does not face any basis risk. What does this mean and what must we understand from this? According to the answers when calculating future prices (for option on futures), the basis risk is still calculated. So why did the question assume there is no basis risk?
August 31, 2017 at 4:27 pm #404686
John Moffat
Keymaster
- Topics: 57
- Replies: 54738
We assume that the basis falls linearly to zero over the life of the future. In practice there is no reason why it should be linear, and the basis risk is the risk that it isn’t linear. (So if there is no basis risk then you assume it falls linearly.)
Author
Posts

Viewing 2 posts - 1 through 2 (of 2 total)

The topic ‘Armstrong Group (Sept/Dec 2015)’ is closed to new replies.