Answer: I and II

## Explanation **Statement I is correct:** Basis risk arises in cross-hedging strategies where the underlying asset and hedge asset are different. When the underlying asset and hedge asset are identical, there is no basis risk because the basis (difference between spot and futures prices) should converge to zero at maturity. **Statement II is correct:** A short hedge position (selling futures to hedge a long spot position) benefits from unexpected strengthening of basis. When basis strengthens (becomes less negative or more positive), the hedger gains because the futures price falls relative to the spot price. **Statement III is incorrect:** A long hedge position (buying futures to hedge a short spot position) benefits from unexpected weakening of basis, not strengthening. Therefore, statements I and II are correct, making option A the correct answer.

Author: LeetQuiz .