Bay daily during the summer months. Elton catches an average of 400 pounds of fish every day and sells them to the local market at the daily spot price. Elton struggles with the uncertainty surrounding his daily total revenue (spot price of sea bass is highly volatile) so he decides to hedge his risk with a 4-day fish swap contract written by the local Commodity Exchange. This type of swap is settled daily.

The current spot price for sea bass is $11 per pound and the fixed swap price is $11.75 per pound.

The floating price on the swap is tied to the Global Bass Index (GBI) . The floating rate on the swap is GBI plus $0.11 per pound.

1. Draw a diagram illustrating the spot and swap positions for Elton.

2. Show the results of the swap contract over the next 4 days if the GBI is $12, $11, $17, and $8. Create a table like we did in class.

3. Identify and discuss three main types of risk to which Elton is exposed in both his spot and derivatives market transactions.