Hedge trades price risk for basis risk

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Reference no: EM131319819

A hedge trades price risk for basis risk. Therefore, an understanding of what causes basis to be weak or strong is useful for understanding the outcome of hedges.

1. In a corn market impacted by drought, basis would likely be strong.

2. Likewise, suppose the next harverst is record large then basis would likely be weak.

Choose one and explain why.

Reference no: EM131319819

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