Question 5 A trader expects the storage cost of a commodity to increase and establishes a calendar spread that is long a three-year forward contract and short a two- year forward contract on the commodity with a spot price of $70. The trader has $100,000 notional value long and short positions in the forward contracts. The storage rate is 3%, the convenience yield is 1%, and the risk-free rate is 2.2%. Please round your answers to two decimal places. a) What short position in the two-year forward contract would hedge the $100,000 notional value position in the three-year contract? [4 marks] b) What long position in the three-year forward contract would hedge the $100,000 notional value position in the two-year contract? [4 marks) c) What is the trader's profit or loss if the spot price changes or the storage cost decreases by 1%? [8 marks] d) Use the above example to explain returns and risks of calendar spreads. [4 marks] Total [20 marks] Question 5 A trader expects the storage cost of a commodity to increase and establishes a calendar spread that is long a three-year forward contract and short a two- year forward contract on the commodity with a spot price of $70. The trader has $100,000 notional value long and short positions in the forward contracts. The storage rate is 3%, the convenience yield is 1%, and the risk-free rate is 2.2%. Please round your answers to two decimal places. a) What short position in the two-year forward contract would hedge the $100,000 notional value position in the three-year contract? [4 marks] b) What long position in the three-year forward contract would hedge the $100,000 notional value position in the two-year contract? [4 marks) c) What is the trader's profit or loss if the spot price changes or the storage cost decreases by 1%? [8 marks] d) Use the above example to explain returns and risks of calendar spreads. [4 marks] Total [20 marks]