a) Discuss three important issues (including basis risk, leverage and financing risk) that arise especially with derivatives hedging strategies. (9 marks) b) i) Azril can go with option 3 or alternatively, option 4 which offers lucrative returns if he invests in a palm oil product to be used in automobiles. This option requires entering into a joint venture agreement with an Indonesian counterpart, Hartono, whose company is still in its infancy. However, based on Hartono's hunch, if everything is goes according to plan, there is a 20 percent chance they can easily make 10, 20 and 30 percent., given several scenarios based on the financial structure and amount approved by the bank. You are required to compute the expected value for each option. Option Expected return (%) Probability Payoff 1 0 1.0 RM100,000 2 6 1.0 RM106,000 3 15 or 3 0.5 RM115,000 or RM103,000 4 10, 20 or 30 0.2 RM110,000 or more (4 marks) b) ii) Provide the inference based on the outcomes for each option. (5 marks) c) A company has the following probability distribution of total physical damage losses per year on its warehouse goods valued at RM50,000. Provide the proposition that can be observed from the probability distribution table. Loss Value (RM) Probability o 0.800 500 0.150 1,000 0.030 5,000 0.010 10,000 0.007 25,000 0.002 50,000 0.001 1.000