a) The basis strengthens unexpectedly. How does it affect the position of a short hedger? (5 marks)

b) On March 1 the spot price of a commodity is $20 and the July futures price is $19. On June 1 the spot price is $24 and the July futures price is $23.50. A company entered into a futures contract on March 1 to hedge the purchase of the commodity on June 1. It closed out its position on June 1. What is the effective price paid by the company for the commodity?

(5 marks)

c) On March 1 the price of a commodity is $300 and the December futures price is $315. On November 1 the price is $280 and the December futures price is $281. A producer entered into a December futures contracts on March 1 to hedge the sale of the commodity on November 1. It closed out its position on November 1. What is the effective price received by the producer?

(5 marks)

d) How many types of traders are there in a derivative security market and who are they? (5 marks)

e) Suppose that the standard deviation of monthly changes in the price of commodity A is $2. The standard deviation of monthly changes in the futures price for a contract on commodity B (which is similar to commodity A) is $3. The correlation between the futures price and the commodity price is 0.9. What hedge ratio should be used when hedging a one month exposure to the price of commodity A?

(5 marks)