1. Suppose that a company has 1000 barrels of low-grade oil that it intends to sell in July. The company wants to hedge against price changes between now and then, but the only instrument available is futures in high-grade oil. If the correlation between price changes in high-grade and low-grade is .9 (that is, a $10 change in high-grade correlates to a $9 change in low grade), how many futures contracts should this company buy? (2 points)
2. We typically think of hedging, speculating, and arbitrage as distinctly different motives, but this need not be the case. In no more than a paragraph and using your own words, describe how it may be difficult to infer motives in this regard. Feel free to use an example if you like. (4 points)
3. Suppose you are tasked with creating portfolio insurance for an investor named Sandy. Sandy's portfolio consists of stocks that aren't heavily traded and aren't really used in any index funds, and physical assets that have significantly fluctuating value. Explain what method of portfolio insurance you would recommend, why, and what potential drawbacks of this method you anticipate. (4 points)