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basis risk

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › basis risk

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.
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  • November 7, 2016 at 9:10 pm #347923
    raniakhan02
    Member
    • Topics: 40
    • Replies: 23
    • ☆☆

    sir what basically is the basis risk?

    November 8, 2016 at 8:08 am #348006
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    If it is foreign exchange futures, then the basis is the difference between the current futures price and the current spot rate. The basis risk is the fact that the basis will change over the life of the future.

    If it is interest rate futures, then the basis is the difference between the current futures price and the current interest rate expressed as a future. Again, the basis risk is the fact that the basis will change over the life of the future.

    (We always assume that the basis will fall linearly to zero over the life of the future in both cases.)

    All of this is explained in detail in my free lectures on foreign exchange risk and interest rate risk – I cannot type out all of the lectures here 🙂

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