QUESTION 2 (25 marks) (a) Explain how market-markets or arbitrageurs use the cash-and-carry strategy and reverse cash-and-carry strategy to make a risk-free profit. Use a transaction and cash flows table to illustrate your explanation. You may consider the underlying asset as a stock. [8] (b) The table below illustrated the details of a commodity prices and interest rate: Year 1 2 3 4 5 Forward Price $41 $42 $43 $44.5 $45.5 Effective interest rate 5.5% 6.0% 6.5% 7.15% 7.45% (i) In a simple commodity swap for two years, explain how a prepaid forward is related to prepaid swap. [5] (ii) What is the different between a 2-year swap price beginning in Year 1 and a 2- year swap beginning after Year 1? Compare their prices. [5] (iii) Suppose a speculator is paying the fixed commodity price and receiving the floating price for three short forward positions start from Year 1 with each contract for each year of active swap. The swap price is $41.9551. What happens to his/her swap positions if all the interest rates fluctuate up or down by 50 basis points. [7]