A denvatives a financial instrument whose value is derived from the value of another asset, which is known as the underlying when the price of the underlying changes the value of the derivative also changes A Derivative is not a product. It is a contract that derives its value from changes in the price of the underlying Required: a) Explain carefully the difference between Hedging. Speculation and Arbitrage [5 Marks] b) What is the difference between entering into a long forward contract when the forward price is K1000 and taking a lang position in a call option with a strike once of K1000 [2 marks] cl Contrast between a forward contract and futures contract [3 Marks] d) A US firm buys goods from a British supplier and needs 1 million in 3 months time He decides to enter into a forward contract with a 3months spot rate of 1614 What would happen, for example, if the spot exchange rate in 3months time was 0) 1.630001) 1 5900 [4 Marks) e) Suppose that a March call option to buy & share for R500 costs K25 and is held until March 1) Under what circumstance (s) will the holder of the option make a profit? [2 marks] 10 Under what circumstance(s) will the opoon be exercised? [2 marks] III) Draw a diagram showing how the profit on a long position in the option depends on the stock price at the matunty of the option [2 Marks] 0. Suppose that you enter into a six month forward contract on a non-dividend paying stock when the stock price is K600 and the nsk-free interest rate (with continuous compounding) is 12% per annum What is the forward price? [4 Marks) [Total 25 Marks)