Question: a.Compare and contrast hedging, speculation and arbitrage. b.A forward contract calls for delivery of one Sigma stock 6months from now. The current market price of

a.Compare and contrast hedging, speculation and arbitrage.

b.A forward contract calls for delivery of one Sigma stock 6months from now. The current market price of one Sigma stock is 40. The price of the forward contract is 45, and the risk-free rate is 4% per annum. The stock is not paying any dividends. Design an arbitrage transaction using one contract. Make sure you list all the steps and the associated cash flows.

c.Imagine you are managing a copper mine and plan to sell 700 metric tons of copper 3 months from today. Since you do not know the future price of copper, you are considering employing a put protection strategy to manage your price risk. A put option giving you the right to sell 1 metric ton of copper for $6.00 per kilogram 3 months from now costs $320. This is the option you want to use.

State the net cash position with and without the put protection if the spot price of copper in 3 months' time turned out to be:

i.$5.30
ii.$6.60?

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