. A
forward contract can reduce the variability of the hedged positions to zero .The futures hedge does
almost as well, producing a $7,000 range of outcomes (form - $4,000 to + $3,000 ).The remaining
risk in the futures hedge arises from variability in the basis- the risk that interest rates in one or
both currencies will change unexpectedly. The futures hedge transforms the nature of Chen ’ s
currency risk exposure from a bet on exchange rates to a bet on the difference between domestic
and foreign interest rates.