Question: a.Compare and contrast the difference between hedging, speculation, and arbitrage. (6 marks) b.A forward contract calls for delivery of one Sigma stock 6 months from

a.Compare and contrast the difference between hedging, speculation, and arbitrage. (6 marks)

b.A forward contract calls for delivery of one Sigma stock 6 months from now. The current market price of one Sigma stock is 60. The price of the forward contract is 65, and the risk-free rate is 4% per annum. Design an arbitrage transaction using one contract. Make sure you list all the steps and the associated cash flows. (8 marks)

c.Imagine you are managing a copper mine and plan to sell 800 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 $6.40 per kilogram 3 months from now costs $360. 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.$5.10
ii.$6.80?

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