Suppose the current spot price is $3. With 50 percent of the probability, the spot price will increase or decrease by 1 dollar for first year and then remain the same as shown in the graph below. t=0 t=1 t=2 Pu=0.5 SO=4 SO=4 SO=3 SO=2 SO=2 Pd=0.5 (b) Assume hedger takes hedge ratio as h*, i.e, if the risk exposure is a long position of 100 units of spot commodity, to hedge the risk, hedger will short 100h* futures underlying on that commodity. Please answer the questions in the right panel in analogy to the left panel, by filling the blanks in j) r) below [6 marks in total, 0.5 marks each): If the stock price falls from 3 to 2, then If the stock price rises from 3 to 4, then a) the future price falls from 3 to 2; j) the future price from the b) hedger makes profit (3-2)x100h*=100h* from the future, at t=1; k) hedger makes future, at t=1; 1) c) by investing the profit from t=1 till t=2, 100h* dollars profit becomes (1+0.1)x100h*=110 h*; from t=1 till t=2, becomes d) meanwhile, hedger makes a loss of 100x(2-3)= -100 from the stock at t=1; m) meanwhile, hedger makes a profit _from the stock at t=1; e) hedger doesn't make further loss on stock from t=1 to t=2; n) hedger doesn't make further on stock from t=1 to t=2; f) net profit/loss is (110h*-100] dollars; o) net profit/loss is g) stock price is 2 at t=2, hence the value of stock at t=2 is 2x100=200; at t=2, hence the value of p) stock price is stock at t=2 is h) the value of futures is its gain and loss, hence, at t=2, its value is 110h*; q) the value of futures is its gain and loss, hence, at t=2, its value is i) the value of the portfolio is the sum of the value of stock and the value of futures, which is [200+110h*]. r) the value of the portfolio is the sum of the value of stock and the value of futures, which is