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Answer: Liquidity risk, which arises from the mismatch in cash flow timing between a derivative instrument and its underlying or hedged transaction.
The correct answer is **B** (Liquidity risk). Liquidity risk is defined as the potential mismatch in cash flow timing between a derivative instrument and its underlying asset or hedged transaction. This aligns with the scenario described in the question. - **A** (Basis risk) is incorrect because it refers to the divergence in expected values, not cash flow timing. - **C** (Systemic risk) is incorrect as it pertains to broader market risks caused by excessive leverage and risk-taking in derivatives, not cash flow timing mismatches.
Author: LeetQuiz Editorial Team
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The potential discrepancy in cash flow timing between a derivative instrument and its underlying asset is most accurately described as:
A
Basis risk, which refers to the divergence between the expected value of a derivative and its underlying or hedged transaction.
B
Liquidity risk, which arises from the mismatch in cash flow timing between a derivative instrument and its underlying or hedged transaction.
C
Systemic risk, which stems from excessive risk-taking and leverage in derivative markets, potentially leading to market stress.
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