A steel factory uses a lot of iron ore in production and therefore wants to protect itself against fluctuations in the iron ore price. The spot price for iron ore is S = SEK 100, the (annual) risk-free interest rate is 5%. The company management is considering whether they would use futures or options for this. A- Describe concretely how the company can protect itself against price fluctuations with futures, or options. What is the difference between the two ways? B- Storage costs for iron ore are (annually) 2%. We also know that the price of iron ore with a one-year maturity on the futures market is F = SEK 110. Is the market arbitrage-free. Motivate your answer. C- What would you do to take advantage of any arbitrage opportunity. D- A call option on iron ore with an exercise price of SEK 120 and a one-year term costs SEK 10. What is the arbitrage-free price of a put option on iron ore with the same exercise price and term. E- What is the time value for (i) the call option and (ii) the put option for sub-question d?

You only need to answer A