hard · FRM Part 1 Financial Markets and Products
An oil producer hedges a delivery of $100,000 barrels of crude oil in six months using a futures contract on a similar but not identical grade of oil. The spot price of the oil to be delivered is S_1 and the futures price is F_1.
If at the time of delivery S_1 = $72 and F_1 = $74, while the hedge was entered at F_0 = $78, what is the basis risk realized?
- The basis is +$2 per barrel; the producer's effective price is $80.
- The basis is $4 per barrel; this is the difference between the initial and final futures prices.
- There is no basis risk because the futures price was higher than the spot price.
- The basis is -$2 per barrel; the producer's effective price is $76 instead of the target $78.
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