Hedgers usually take on which type of risk?

Hedgers usually take on which type of risk?

• A. Price risk
• B. Basis risk
• C. Liquidity risk
• D. Credit risk

Answer: (B)

Hedgers aim to reduce price risk by using futures to lock in a price, but the cash market and the futures market don’t always move together. The difference between the cash price and the futures price—the basis—can change over time. When the basis shifts, the hedge isn’t perfect, leaving residual risk known as basis risk. For example, a producer hedging with futures might see the cash price fall, but if the basis narrows or widens unexpectedly, the overall protection isn’t fully realized. That imperfect hedge is why basis risk is the risk hedgers commonly take on.

Hedgers aim to reduce price risk by using futures to lock in a price, but the cash market and the futures market don’t always move together. The difference between the cash price and the futures price—the basis—can change over time. When the basis shifts, the hedge isn’t perfect, leaving residual risk known as basis risk. For example, a producer hedging with futures might see the cash price fall, but if the basis narrows or widens unexpectedly, the overall protection isn’t fully realized. That imperfect hedge is why basis risk is the risk hedgers commonly take on.