Part A (15 Marks), each question carries 3 marks. Provide brief answers. 1. What is the difference between a long forward position and a short forward position? 2. Explain the difference between hedging, speculation and arbitrage. 3. Explain carefully the difference between writing a call option and buying a put option. 4. A trader enters into a short forward contract on 100 million yen. The forward exchange rate is $0.0080 per yen. How much does the trader gain or lose if the exchange rate at the end of the contract is (a) $0.0074 per yen, and (b) $0.0091 per yen? 5. A trader buys a put option on a share for $3. The stock price is $42 and the strike price is $40. Under what circumstances does the trader make a profit? Under what circumstances will the option be exercised? Part B (10 marks) fo So so 6 6. The price of gold is currently $500 per ounce. The forward price for delivery in one year is $700. An arbitrageur can borrow at 10% per annum. What should the arbitrageur do? Assume that the cost of storing gold is zero and that gold provides no income