Question 1 comprises three parts. Students are to answer ALL parts of this question: a) Hedging strategies using futures contracts are not always perfect and straightforward. Give three reasons as to why this might be the case? (3 marks) b) A futures contract over copper has 23 months remaining until maturity. The current futures price of this contract is $6,000 per tonne, and the storage costs of copper are 2% p.a. compounded weekly. The current spot price of copper is $5,500 per tonne. Using this information, solve for the continuously compounded risk free rate of interest. In answering this question assume there are no arbitrage opportunities present in the market. (5 marks) c) An investor is wanting to hedge the value of their portfolio, and decides to use forward contracts on the ASX200. A 14-month forward contract is entered into when the ASX200 is at a level of 6,400. The risk free rate of interest in Australia is 6% p.a. with continuous compounding and the ASX200 has a dividend yield if 3%p.a. with quarterly compounding. Answer the following questions: i. ii. What is the forward price and initial value of the forward contract? (3 marks) Five months later, the ASX 200 is now at a level of 5,800. The interest rate in Australia and the dividend yield on the ASX200 remain the same. What is the new forward price, and the resulting value of the forward contract