Define the forms of basis risk and explain why it is important for a hedger to understand this risk prior to dealing in derivative products. Use examples to explain your responses.

Posted: January 10th, 2022

(a) Define the forms of basis risk and explain why it is important for a hedger to understand this risk prior to dealing in derivative products. Use examples to explain your responses.

(b) When hedging risk, what is cross-commodity risk? In your answer, provide examples to explain cross-commodity risk within the context of interest rate risk and share price risk. (LO 19.6)