Suppose that spot and futures prices of the underlying asset when hedge is initiated are $3.10 and $2.50 respectively, and

when hedge is closed out are $2.90 and $2.80 respectively.

1. What is the meaning of above numbers? 2. What is the basis risk when hedge is initiated?

3. What is the basis risk when hedge is closed out?

4. Is it a perfect hedge? 5. What will be the effective price received (paid) for the

hedging asset? (S + F-F)