1. Dai has company A’s stock and plan to sell it after two months at a specified date in the middle of that month. Dai would like to hedge the price of risk of company A’s stock. To hedge the company A’s stock without incurring basis risk，how could she do?
- Short a two-month forward contract on the S&P 500 index
- Short a two-month forward contract on company A’s stock
- Short a three-month futures contract on company A’s stock
- Answers A. and B. are correct.
Basis risk is minimized when the maturity of the hedging instrument coincides with the horizon of the hedge (i.e., two months) and when the hedging instrument is exposed to the same risk factor (i.e., IBM).