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Answer: The potential discrepancy between the anticipated value of a derivative and its underlying asset.
**Explanation:** Basis risk refers to the potential divergence between the expected value of a derivative and its underlying asset. This risk arises because the derivative and the underlying may not move in perfect tandem due to factors such as differences in timing, liquidity, or market conditions. - **Option A** describes liquidity risk, which occurs when an investor cannot meet a margin call due to lack of funds, not basis risk. - **Option C** also pertains to liquidity risk, specifically the timing mismatch in cash flows, which is distinct from basis risk. Thus, **Option B** is the correct answer as it accurately defines basis risk.
Author: LeetQuiz Editorial Team
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Basis risk is most accurately defined as:
A
The inability of an investor to fulfill a margin call owing to insufficient funds.
B
The potential discrepancy between the anticipated value of a derivative and its underlying asset.
C
A mismatch in the timing of cash flows between a derivative and its underlying transaction.