Basis Risk for a hedger

December 4th, 2015, 08:57 AM

Hello Everyone

If I enter in a cash settled futures contract expiring 4 months from today and wait until expiration, does all the marked to market daily adjustments will be closed to zero? In other words, there will be no basis risk at expiry date? Keep in mind I'm looking from a point of view of a hedger not a trader. I'm guessing there are differences in the approach.

Thank you for your responses. I'm a new to futures and trying to understand this basis risk deal.

Lawton

December 5th, 2015, 12:19 PM

Hello Everyone

Since nobody responded to the first post, I'm rephrasing it.

I'm trying to understand from a hedger perspective and migrating from FOREX so bear with me.
Assume a cash settled instrument for a FX futures contract on currency pair AAA/BBB, and no margin calls during the 4 months of the contract.
enter in a long position today (Date d1) to deliver in 4 months from today (Date d2)
future contract on d1 for a delivery on d2 is 1.5AAA=1 BBB
Spot on d1 is 1.45AAA=1BBB
every day the contract goes under marked to market adjustment and there will be losses and gains during the 4 month until expiry date d2.

On d2 the future for AAA/BBB is settled at 1.47AAA=1BBB. The spot on d2 is 1.43AAA=1BBB
Is the profit/loss at d2 on the future contract closed to 1.5-1.47=0.03 loss?
If so, what happens with the daily settlements? Do they net to zero?
Is that 0.03 loss the basis risk? or the basis risk is the difference between spot and futures at date d2 1.47-1.43 = 0.04?

thank you,

Lawton

Basis Risk for a hedger

Discussion in Traders Hideout

Basis Risk for a hedger