Answer: basis swap.

## Explanation This scenario describes a **Basis Swap**: **Basis Swap Definition:** A basis swap involves exchanging the returns of two different but related assets. In this case: - The investor has exposure to an **illiquid commodity** - They use a **liquid, correlated commodity** as a hedging instrument - The swap helps manage the **basis risk** - the risk that the relationship between the two commodities changes **How it works:** - The investor pays the return on the illiquid commodity - Receives the return on the liquid commodity - This hedges their exposure while using a more liquid instrument **Other options:** - **Variance swap**: Based on volatility, not commodity price correlation - **Total return swap**: Provides exposure to a single asset's total return Therefore, this is best described as **A: basis swap**.

Author: LeetQuiz Editorial Team