Question 4

Discuss

• When and why is basis or futures mispricing risk important for hedgers?
• What is the effect of mispriced futures on the returns of a short-term hedge?

Discuss

If futures are over-priced (underpriced) relative to the spot, do you expect futures to be more or less over-priced (underpriced) in the next period?

• Does it depend on the length of this period (one day or one week or one month)?
• What are the implications of this for mispricing/basis risk involved in hedging?