1. Distinguish between a speculator and a hedger. Give an example of a short hedger and a long hedger.

2. In each of the following situations, discuss how Esi might use stock futures index to protect a well-diversified stock portfolio:

a. Esi expects to receive a sizeable bonus in two month and would like to invest in stocks, believing that current stock prices are very attractive.

b. She expects the stock market to decline very soon and realises that quickly selling a stock portfolio would result in significant transaction costs.

3 . A cocoa importer holds 100 metric tons of cocoa in anticipation of future sales. She has a contract to deliver cocoa one month from now to a retailer. Market prices

have been falling. Today, 3-month Cocoa futures are selling

at $1,400 per metric ton. How can this importer hedge her exposure to falling prices? Suppose in one month spot cocoa price is $1,300 and the futures price is $1,350