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 * S0=2 S0=2 Pd=0.5 Please answer the following questions. (a) If the annual discrete compounding risk-free rate is 10%, and the cost of carry offsets the convenience yield exactly, then the future price is equal to the spot price. Please explain. [1 mark] t=0 t=1 t=2 Pu=0.5 F1,2=4 > F2,2=4 FO,2=3 > F1,2=2 > F2,2=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): 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 * S0=2 S0=2 Pd=0.5 Please answer the following questions. (a) If the annual discrete compounding risk-free rate is 10%, and the cost of carry offsets the convenience yield exactly, then the future price is equal to the spot price. Please explain. [1 mark] t=0 t=1 t=2 Pu=0.5 F1,2=4 > F2,2=4 FO,2=3 > F1,2=2 > F2,2=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)