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A short hedge is initiated on the S&P 500 at time t=1. The hedger buys...

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Finance

A short hedge is initiated on the S&P 500 at time t=1. The hedger buys an S&P 500 ETF at this time and sells the E-mini S&P 500 futures contract against it at this time. The trade is put on so the hedge is a "perfect hedge" if held until maturity. The S&P 500 ETF price at time t=1 is $3,900 and the futures price at time t=1 is $3,950.

The hedge is later closed by the trader at time t=2 when the S&P 500 ETF is at a spot price of $3,700 and the futures price of the S&P 500 is at $3,650. What profit or loss on this closed out hedge occurs due to basis risk incurred by the hedger over the period?

Group of answer choices

$50 profit

$50 loss

$100 profit

$100 loss

$150 profit

$150 loss

$0

Answer & Explanation Solved by verified expert
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