FRM-FMP

anbu.edu
Finance Junkie
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FRM-FMP

In analyzing the differences between the spot price of wheat and the price of a wheat futures contracts at a given time, what causes changes in the basis?

A) Changes in cost of carry of the asset.
B) Price volatility.
C) Basis risk.
D) Arbitrage transactions.

If the Ans is A then Y cant it be B or C . the diff can also be inf by price volatility

naresh.thkr
Good Student
Posts: 25
Joined: Sat Aug 11, 2012 7:02 pm

FRM-FMP

Price volatility will impact both spot as well as futures prices of wheat hence, B is ruled out and Basis risk cant be causes of changes in basis. So, the correct answer is A.

Plz correct me if i m wrong.

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

FRM-FMP

The answer is A
See, since the spot and the future have the same underlying, C is wrong.
Now, the relationship between S and F is F=Se^t(r-benifits+storage costs)
Hence A is the answer

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