Question 2 (15 marks) Suppose an air-cargo carrier needs to consume substantial fuel for its operation. Tim, its finance manager, is concerned that the rising prices of oil will increase the operating costs and eat into the company's profit. He wishes to hedge against that risk by some derivative products. a. Complete the table below for a long position in a call option with an exercise price of $70 and a premium of $4 per barrel. Ignore the time differential between the initial option expenses or receipt and the terminal payoff. Please copy the table in your answer booklet. (10 marks) Expiration date Expiration date Initial option Combined oil price option payoff premium terminal position value (40) (50) (60) (70) (80) (90) (100) b. Tim is also offered with a forward contract in oil, at a fixed price of $70. Assume the option in (a) and forward contract will expire at the same point in the future. Compare the end results of option and forward contract, under the same range of expiration date oil price from $40 to $100. (5 marks) (Total: 15 marks)