(24 Points) Short descriptive questions. (a) In a short sale scenario, the lender of the stock may require the borrower to post collateral to mitigate against default risk. Can the lender eliminate their exposure to default risk with collateral? Explain why they can or cannot. [3 points) (b) For each of the following n-year coupon paying bonds, indicate which is greater the yield to maturity or the coupon rate [3 points]: Bond selling at par Bond selling at a discount Bond selling at a premium (c) Which of the following are hedging strategies on a commodity for a company which uses the commodity as an input for their production (i.e. they are a buyer of the commodity For each of the strategies below, indicate with either a "Yes" if it is a hedging strategy for the buyer or a "No" if it is not a hedging strategy for the buyer. Also, provide an brief explanation for why you've selected either a "Yes" or a "No" for each strategy. [5 Points) i. ii. iii. iv. V. Selling a call on the commodity Buying a collar position on the commodity Buying a call on the commodity Selling a forward on the commodity A short futures on the commodity (d) For a change in yield to maturity, explain in your own words why the approximate bond price calculated using duration is always less than the fully recalculated bond price using the new yield to maturity. Use a diagram with yield to maturity on the horizontal axis and bond price on the vertical axis to help explain your point. [8 Points) (e) Explain in your own words the reason why a Eurodollar futures contract needs to be tailed in order to hedge the rate paid on a loan that is taken out at a future date. State the term (or name) for the difference between the FRA (forward rate agreement) rate and Eurodollar rate. If there were no difference between the Eurodollar rate and the FRA rate, state who is systematically favoured in a Eurodollar futures contract: the borrower or the lender [5 points)