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BASIS VOLATILITY: IMPLICATIONS FOR HEDGING
Author(s) -
Castelino Mark G.
Publication year - 1989
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1989.tb00110.x
Subject(s) - futures contract , hedge , basis risk , market neutral , volatility (finance) , expiration , futures market , duration (music) , economics , expiration date , actuarial science , econometrics , financial economics , business , capital asset pricing model , psychology , portfolio , ecology , art , chemistry , literature , food science , psychiatry , respiratory system , biology
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.