medium · FRM Part 1 Financial Markets and Products
A risk manager is concerned about 'basis risk' in a hedging program.
Which of the following scenarios best exemplifies this risk?
- An airline hedges its jet fuel exposure using heating oil futures because a jet fuel futures contract is unavailable.
- A bank hedges its interest rate risk by selling all of its long-term bonds and holding cash.
- A firm's currency hedge loses value as the domestic currency strengthens, offsetting gains in the underlying export business.
- An investor's stop-loss order is executed at a price significantly lower than the specified trigger during a market crash.
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