BASIS VOLATILITY: IMPLICATIONS FOR HEDGING

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Abstract

Most hedges placed in futures markets must be lifted before contract expiration, which necessitates incurring “basis risk.” The focus of this paper is on quantifying such risk as a function of the timing of a hedge, its duration, distance from contract expiration, hedge life, and other market‐observable variables. The development of basis‐risk profiles provides a hedger with estimates of hedging risks that reasonably can be expected before the actual placement of hedges, thus serving as a useful input in the hedging decision.

Original languageEnglish (US)
Pages (from-to)157-172
Number of pages16
JournalJournal of Financial Research
Volume12
Issue number2
DOIs
StatePublished - 1989

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance

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