Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Can you please help by filling in the blanks. (j-r) Suppose the current spot price is $3. With 50 percent of the probability, the spot

Can you please help by filling in the blanks. (j-r) image text in transcribed
Suppose the current spot price is $3. With 50 percent of the probability, the spot price will increase or decrease by 1 dollar for first year and then remain the same as shown in the graph below. 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. If the stock price falls from 3 to 2, then if the stock price rises from 3 to 4, then a) the future price falls from 3 to 2: D the future price _from the b) hedger makes profit (3-2)x 100h-100h from the future, at t=1; k) hedger makes future, at t-1: c) by investing the profit from t=1 tillt=2, 100h dollars | 0 profit becomes (1+0.1)x100h-110 h; from t=1 tillt=2 becomes d) meanwhile, hedger makes a loss of 100x(2-3) -100 from the stock at t=1; m) meanwhile, hedger makes a profit ...from the stock at t=1; e) hedger doesn't make further loss on stock from t=1 tot-2: n) hedger doesn't make further an stock from t-1 to t-2: f) net profit/loss is [110h-100) dollars; o) net profit/loss is g) stock price is 2 at t=2, hence the value of stock at t=2 is 2x100-200: p) stock price is att-2, hence the value of stock at t-2is_ h) the value of futures is its gain and loss, hence, at t-2, its value is 110h; q) 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 [200+110h"). In the value of the portfolio is the sum of the value of stock and the value of futures, which

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Analytical Finance Volume I

Authors: Jan R. M. Röman

1st Edition

3319340263, 978-3319340265

More Books

Students also viewed these Finance questions

Question

Describe the three major goals of diversity initiatives.

Answered: 1 week ago