Question 2 (12 points) Throughout this question, assume that the one-year risk-free rate is 6%. In each of the parts, state any additional assumptions needed to solve the problem. a) The FTSE Stock Index has current price of 5900 and annual dividend yield of 2%. Find the futures price of a 3-month contract on the index. (3 points) b) There is a temporary unexpected glut of wheat on world markets due to an unusually large harvest. Storage facilities are over-full and wheat users have excess inventories. Storage costs are $10 per ton per annum. The spot price of wheat is $600 per ton. What is the approximate futures price of wheat for delivery in 2 months time? (3 points) c) The current exchange rate is 130 Euros for 100 pounds sterling. The short-term interest rate in the Euro area is 4% per annum and in the UK 2% per annum. Consider a British corporation which needs to secure 100 million Euros in 6 months time for a large capital expenditure. It will sign a forward contract with a bank to borrow the money for the expenditure in six months time and pay the loan back in pounds sterling at the end of the year. Approximately what end-of year loan repayment should the bank demand (in pounds sterling) to agree now to fund the 100 million Euro expenditure in 6 months time? (6 points) Question 3 (15 points) A stock has a current price of $60. Each month the price rises by 10% or falls by 5%, with equal probability. The monthly risk-free rate is 1%. a) Find the current price of a European put option on the stock with two months until expiration and exercise price of $65. (5 points) b) Consider an option trader who has sold a call option on the stock with exercise price of $58 and two months until expiration. How many shares of stock must he hold at time zero to hedge his option position? (5 points) c) Describe the parameters of the Black-Scholes option pricing model and whether marginal changes in each parameter affect the price of a call option positively or negatively. (5 points)