complete the assignment that i have attach with an accurate solution. ill wait till the result came out before i rate your answer. please make sure the answer is correct and fully explain it when the statement ask you to. appreciate

2016 BEA380 Assignment 2 [10 marks] Due: Week 12: Thursday 6 October, 2016 @ 12:00pm [via Dropbox] Question 1a [1 mark] Open interest tends to be low when a contract with a new expiration is first listed for trading, and it tends to be small after the contract has traded for a long time. Explain. Question 1b [1 mark] Explain why the futures price converges to the spot price and discuss what would happen if this convergence failed. Question 2 [2 marks] A cocoa merchant holds a current inventory of goods worth $10 million at present prices of $1,250 per metric ton. The standard deviation of returns for the inventory is 0.11. She is considering a risk-minimisation hedge of her inventory using the cocoa contract of the Coffee, Cocoa and Sugar Exchange. The contract size is 10 metric tons. The volatility of the futures is 0.33. For the particular grade of cocoa in her inventory, the correlation between futures and spot cocoa is 0.88. Compute the risk-minimisation hedge ratio and determine how many contracts she should trade. Question 3 [3 marks] Tracy Mathers manages the $60 million equity portion of Gamma Corporation's pension assets. In late August 2016 Gamma announced that it was downsizing its workforce and would be offering early retirement to many of the older employees. The impact on the portfolio Tracy manages would be an anticipated $10 million withdrawal over the next 4 months. The US stockmarket has been good for the past 5 years, but recently there have been signs of weakness. Tracy is concerned about the drop is asset prices before the $10 million is withdrawn from the portfolio. Tracy runs a fairly aggressive portfolio with a beta of 1.2, relative to the S&P500 Index. The following were the prevailing S&P500 futures prices: Expiration Contract Value $250 * Index SEP16 1088.50 DEC16 1100.00 MAR17 1110.50 a) How much of the portfolio should Tracy have hedged? Justify your answer. b) Design a hedge based on your answer to part a) above. Question 4 [3 marks] A swap dealer notes the following spot interest rates: six months, 3.45%; twelve months, 3.65%; 18 months, 3.90% and 24 months, 4.15%. a) Determine the equilibrium swap price on a semiannual payment, two-year swap. b) The swap dealer enters into a $50 million two-year swap with a fixed rate equal to the solution in part a above. He chooses to hedge this via a stack hedge. Determine the number of Eurodollar futures contracts necessary to do so. Each basis point change in the futures contract is equal to $25