I am trying to insert an image into my pdf report using <fo:external-graphic>
tag.  I am using Cocoon 2.0.4.  I would like to use relative url.  In other
words, I would like to not always type in the context.  How do I configure
and do that?

You need to set a base directory or base URL in the
serializer config. Details can be looked up in the
Cocoon documentation or the Wiki.

This question should have better been asked on the
Cocoon user list.