Question

Question 4 (Final 2011: 10 points)

(a)        (3 points) The spot price for gold is $650. The risk-free interest rate is 5%. What is the futures price for gold for a six-month contract?

(b)       (5 points) The six-month futures price in the market is $682.50. Is there an arbitrage opportunity here? Why? If so how would you exploit it? Explain.

            (c)        (2 points) Consider the formula on the formula sheet:

What does ‘c’ represent? What is ‘c’ likely to be for gold? What about for oil? Why? Hint: I am not looking for a numerical answer here.

Question 4 (Final 2011: 10 points) (a) (3 points) The spot price for gold is $650. The risk-free interest rate is 5%. What is the futures price for gold for a six-month contract? (b) (5 points) The six-month futures price in the market is $682.50. Is there an arbitrage opportunity here? Why? If so how would you exploit it? Explain. (c) (2 points) Consider the formula on the formula sheet: Fo = P, (1+r, +c) What does 'c' represent? What is ‘c' likely to be for gold? What about for oil? Why? Hint: I am not looking for a numerical answer here.

Answer 1

Here is solution of your question. All the best

a.) Interest eate = 5% annual Semi Annual 2 0.025. fultive price of gold for 6mon 2 650x (1+0.025) 3 $ 666.25 we b) of six-month future price ů $682.50, so rell six-month future & buy good at spot $ 650 at 5% interest then there will be profit of = 16.254. have calculated future price $666.25 for 6506&pot. So, 1682.50 – 666,25) = 16.25. so we can say yer, there is arbitrage opportunity OHC) in formula - C = represent storage cost for Oil (represent cost of carry for Gold ..