Explain why firms trade basis Instead of futures or flat price
Added by Paul B.
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Firms trade basis to manage price risk more effectively, as it reflects local market conditions and can provide a more accurate picture of the actual price they will receive or pay. Show more…
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On March 1, the price of oil is $20 and the July futures price is $19. On June 1, the price of oil is $24 and the July futures price is $23.50. A company entered into futures contracts on March 1 to hedge the purchase of oil on June 1. It closed out its position on June 1. a. What kind of hedge should it be? b. What is the effective price paid by the company for the oil? c. What is the basis risk? d. What would be the ideal price if the basis risk were zero? On March 1, the price of gold is $300 and the December futures price is $315. On November 1, the price of gold is $280 and the December futures price is $281. A gold producer entered into a December futures contract on March 1 to hedge the sale of gold on November 1. It closed out its position on November 1. a. What kind of hedge should it be? b. What is the effective price received by the producer for the gold? c. What is the basis risk? d. What would be the ideal price if the basis risk were zero?
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Which of the following statements is not true? A hog farmer's decision to sell hog futures is an example of short hedging to limit risk. A company that mines bauxite, an aluminum ore, decides to short aluminum futures. This is an example of cross-hedging. Marking-to-market refers to the daily settlement of obligations on future positions. Forward contracts are traded on an organized exchange, and futures contracts are traded on the OTC markets.
disadvantages of using futures to hedge risk
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