a) Consider the following three-month call option prices with different strike prices:

Strike price, K	80	100	120
Option premium	10	7.5	6

i. Construct a butterfly spread and present the profit/loss diagram of the strategy. Create a profit/loss table for possible values of the underlying asset at maturity and calculate the range of prices for which the strategy is profitable. (10 marks) ii. What are the main differences between the above strategy and a short straddle? (5 marks) b) Briefly discuss the theory of normal backwardation. What does the recent evidence suggest about the commodity risk premium? (15 marks) c) Suppose you are expecting an announcement of corn inventories in a few days from now. There has been a period of severe drought. What impact do you expect the announcement to have on the position of a long hedger and that of a long speculator? Use arguments from the theory of storage to support your answer. (10 marks)

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