1. Assume hedger takes hedge ratio as h*, i.e, if the risk exposure is a long position of 100 units of spot commodity, to hedge the risk, hedger will short 100h* futures underlying on that commodity. Please answer the questions in the right panel in analogy to the left panel, by filling the blanks in j) r) below [6 marks in total, 0.5 marks each]:

If the stock price falls from 3 to 2, then

1. the future price falls from 3 to 2;
2. hedger makes profit (3-2)100h*=100h* from the future, at t=1;
3. by investing the profit from t=1 till t=2, 100h* dollars profit becomes (1+0.1)100h*=110 h*;
4. meanwhile, hedger makes a loss of 100(2-3)= -100 from the stock at t=1;
5. hedger doesnt make further loss on stock from t=1 to t=2;
6. net profit/loss is [110h*-100] dollars;
7. stock price is 2 at t=2, hence the value of stock at t=2 is 2100=200;
8. the value of futures is its gain and loss, hence, at t=2, its value is 110h*;
1. the value of the portfolio is the sum of the value of stock and the value of futures, which is [200+110h*].

If the stock price rises from 3 to 4, then

10. the future price____________________;
11. hedger makes_________________from the future, at t=1;

50. ___________________from t=1 till t=2, _______________becomes _______________________________;

1000. meanwhile, hedger makes a profit _______________from the stock at t=1;
14. hedger doesnt make further _____________on stock from t=1 to t=2;
15. net profit/loss is___________________;
16. stock price is_____ at t=2, hence the value of stock at t=2 is______________;
17. the value of futures is its gain and loss, hence, at t=2, its value is____________;
18. the value of the portfolio is the sum of the value of stock and the value of futures, which is___________________.