(1) Assume you have a portfolio that contains stocks that track the market index. You now want to change this portfolio to be 20% in commodities and only 80% in the market index. How would you use derivatives to implement your strategy?

(2) A trader enters into a short cotton futures contract when the futures price is 50 cents per pound. The contract is for the delivery of 50,000 pounds. How much does the trader gain or lose if the cotton price at the end of the contract is (a) 48.20 cents per pound (b) 51.30 cents per pound?

(3) In March, a U.S. investor instructs a broker to sell one July put option contract on a stock. The stock price is $42 and the strike price is $40. The option price is $3. Explain what the investor has agreed to. Under what circumstances will the trade prove to be profitable? What are the risks?