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

a)the future price falls from 3 to 2;

b)hedger makes profit (3-2)100h*=100h* from the future, at t=1;

c)by investing the profit from t=1 till t=2, 100h* dollars profit becomes (1+0.1)100h*=110 h*;

d)meanwhile, hedger makes a loss of 100(2-3)= -100 from the stock at t=1;

e)hedger doesn't make further loss on stock from t=1 to t=2;

f)net profit/loss is [110h*-100] dollars;

g)stock price is 2 at t=2, hence the value of stock at t=2 is 2100=200;

h)the value of futures is its gain and loss, hence, at t=2,its value is 110h*;

i)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

a)the future price____________________;

b)hedger makes_________________from the future, at t=1;

c)___________________from t=1 till t=2, _______________becomes_______________________________;

d)meanwhile, hedger makes a profit _______________from the stock at t=1;

e)hedger doesn't make further _____________on stock from t=1 to t=2;

f)net profit/loss is___________________;

g)stock price is_____ at t=2, hence the value of stock at t=2 is______________;

h)the value of futures is its gain and loss, hence, at t=2,its value is____________;

i)the value of the portfolio is the sum of the value of stock and the value of futures, which is___________________.