Question:

(a) You have just been recruited as risk analyst at the Air Mauritius Limited. Your risk manager is trapped between diverging expectations. He is not sure whether oil prices will rise or fall in three months' time. According to you, what could be the best hedging technique present to neutralize risks?

(b) Differentiate between hedgers, arbitrageurs and speculators.

(c) What are the factors that stimulate firms in Mauritius to hedge? Justify your answers with proper examples.

(d) Explain the use of weather derivatives and credit derivatives in risk management. Are these instruments present in Mauritius?

(e) What do you understand by the term "Hedging Effectiveness"?