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Answer: I and III
## Explanation **Statement I is correct**: Basis risk arises when there is a mismatch between the underlying asset being hedged and the hedging instrument. In cross-hedging strategies (where the hedge asset is different from the underlying asset), basis risk exists. However, when the underlying asset and hedge asset are identical, there is theoretically no basis risk. **Statement II is incorrect**: A short hedge position (selling futures to hedge a long spot position) benefits from unexpected *weakening* of basis, not strengthening. **Statement III is correct**: A long hedge position (buying futures to hedge a short spot position) benefits from unexpected *strengthening* of basis. Therefore, only statements I and III are correct, making option B the correct answer.
Author: LeetQuiz Editorial Team
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Which of the following statements are true with respect to basis risk?
I. Basis risk arises in cross-hedging strategies but there is no basis risk when the underlying asset and hedge asset are identical.
II. Short hedge position benefits from unexpected strengthening of basis.
III. Long hedge position benefits from unexpected strengthening of basis.
A
I and II
B
I and III
C
II only
D
III only
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