2. (a) Explain carefully the difference between the delivery price (strike price) K, the forward price F, and the value f of a forward contract. (b) You run an Irish company which is an importer from USA and you expect to have to pay 1 million dollars in 6 months. Explain how the exchange rate risk can be hedged using a forward contract and an option. [3] (c) (i) An investor has just taken a long position in a 9-month forward contract on a coupon-bearing bond that will mature 9 months from today. The bond is expected to pay a coupon of 30 in 3 months and another coupon of 30 in 6 months. The bond price is 550 , and the risk-free rate of interest is 5% per annum with continuous compounding for all maturities. Determine the strike price, the forward price and the initial value of the forward contract. [3] (ii) Four months later, the price of the bond is 600 and the risk-free rates of interest are 3% for maturity 2 months and 3.8% for maturity 5 months. What are the strike price, the forward price and the value of the long position in the forward contract? (iii) If the forward price for that contract computed in 2(c)ii was 582 , what arbitrage opportunities does this create? How much will you gain with that strategy? (d) (i) Give the definition of derivative instrument and explain what is a future contract. (ii) The spot price of silver is $700 per ounce. The storage costs are $100 per ounce per year with the payment being made at the end of the year. As- suming that interest rates are 3.5% per annum for all maturities, calculate the futures price per ounce of silver for delivery in 1 year (iii) You are a jewellery maker and you enter into futures contracts on silver. Take all the data equal to 2d)ii. Compute a bound for the future price and the convenience yield in case Fo= $810