2002•RorecastingRequires access

Hedge and Basis Risk

Lu Tai

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Abstract

The purpose of hedge transaction is hedger transfer risk of price fluctuation on spot market. The result of hedge is usually affected by basis change. So basis risk can change the result of hedge. This paper discusses how to measure basis risk, control basis risk and choose transaction opportunity and so on. And the paper also gives a systematic research on the hedge transaction decision approaches for the purpose of controlling and removing basis risk.

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What this paper is about

The purpose of hedge transaction is hedger transfer risk of price fluctuation on spot market. The result of hedge is usually affected by basis change. So basis risk can change the result of hedge. This paper discusses how to measure basis risk, control basis risk and choose transaction opportunity and so on. And the paper also gives a systematic research on the hedge transaction decision approaches for the purpose of controlling and removing basis risk.

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Available abstract

The purpose of hedge transaction is hedger transfer risk of price fluctuation on spot market. The result of hedge is usually affected by basis change. So basis risk can change the result of hedge. This paper discusses how to measure basis risk, control basis risk and choose transaction opportunity and so on. And the paper also gives a systematic research on the hedge transaction decision approaches for the purpose of controlling and removing basis risk.

Key concepts: Basis risk, Hedge, Market neutral, Basis (linear algebra), Database transaction, Business, Actuarial science, Risk management

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