(d) The requirement is to identify the risk that relates to
the possibility that a derivative might not be effective at hedging a
particular asset. Answer (d) is correct because basis risk is the
risk of loss from ineffective hedging activities. Answer (a) is incorrect
because credit risk is the risk of loss as a result of the
counterparty to the derivative agreement failing to meet its obligation.
Answer (b) is incorrect because market risk is the risk of
loss from adverse changes in market factors. Answer (c) is incorrect
because legal risk is the risk of loss from a legal or regulatory
action that invalidates the derivative agreement.