Basis risk — OpenTuition Forums

Ddazhong070313y ago

I heard someone said basis and basis risk are not the same. Basis is the difference between spot rate and futures price, but basis risk is the risk that basis does not fall in lenear to zero.
The examiner seems have complained the students don't understand the two difference.
Could you double confirm same or not, pls? Thank you.

Hharripool13y ago#1

Hi,
Basis is the difference between libor and futures price (so yes)
Basis risk is that basis does not fall to that which is forecast for contracts ended before the expiry date. Further, basis always falls to zero if futures run their full term, however this may not happen linearaly and contracts ended early, run the risk of the unused basis not equalling that which was predicted (I.e linear)

So yes I think your assumptions are correct. Hopefully John can confirm

John MoffatTutor13y ago#2

Yes - harripool is correct. (The old examiner used to use the words to mean the same thing, but he was wrong)