Question: a.How do hedging, speculation, and arbitrage differ from one another? b. It is not always optimal for a company to hedge out all of its

a.How do hedging, speculation, and arbitrage differ from one another?

b.It is not always optimal for a company to hedge out all of its risks. Discuss the above statement, supporting your view with at least three reasons why managers might decide not to hedge all risks.

c.A forward contract calls for delivery of one Alpha stock 3 months from now. The current market price of one Alpha stock is 40. The price of the forward contract is 45, and the risk-free rate is 3% per annum. Design an arbitrage transaction for the issuer of a forward contract, using one contract. Make sure you list all the steps and the associated cash flows.

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