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Basis risk can arise from a number of different sources, and is a more significant problem for stock index contracts than for other financial futures,
Basis risk can arise from a number of different sources, and is a more significant problem for stock index contracts than for other financial futures, like Treasury bills and bonds (Figlewski in the Wiley). *For the educational purpose only. A bank that hedges with financial futures cannot completely eliminate interest rate risk. Required: (i) Briefly explain the concept of basis risk. (ii) State whether the basis risk can be eliminated or not from the banking system.
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