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Find the no-arbitrage forward price
Question 1 (Forward Contracts) Consider a good that has a spot...
10. (Lecture Note 2) The current spot price of trader, can borrow money at 6% per...
10. (Lecture Note 2) The current spot price of trader, can borrow money at 6% per year wit 3% per year with continuous compounding. The cu ne current spot price of silver is $16.75 per troy ounce. Sam Chatwick, a metals w money at 6% per year with continuous compounding and lend money (risk-free) at with continuous compounding. The current six-month forward price of silver is $17.13. Does Jarl have any arbitrage opportunities? If one does exist. use an arbitrare...
Suppose you bought a forward contract on January 1 that matures six months later. The forward...
Suppose you bought a forward contract on January 1 that matures six months later. The forward price was $220 at the time of purchase, and the continuously compounded interest rate was 8% per year. Three months have passed, and the spot price is now $150. What is the value of your forward contract today?
The original question and answers are shown below, but my question is how do we get...
The original question and answers are shown below, but my question is how do we get the value:Pound0.98 when answering the part B question? Assume a forward contract on pound sterling. Suppose the spot exchange rate is $1.60/pound. Suppose the three month interest rate on dollar is 6% while the three month interest rate on pound is 8%, both continuous compounding terms. What is the arbitrage free three month forward rate? (a) What is the arbitrage free forward price? (b)...
Today's spot price of gold is $1,650 per ounce. The quoted six-month forward price for gold...
Today's spot price of gold is $1,650 per ounce. The quoted six-month forward price for gold is $1,700. The arbitrage profit that you can make today by trading one forward contract and other securities is $6. Assuming no storage cost, what could be the continuously compounded interest rate per annum? 5.26% 5.24% 6.68% 6.80%
NEW R 3. A Canadian company pays $300,000 consulting fee to a U.S. consulting company in...
NEW R 3. A Canadian company pays $300,000 consulting fee to a U.S. consulting company in San Diego. Which of the following account in the U.S. balance of payment statement will be affected by the cross-border transaction? A) Current account B) Capital account C) Foreign reserve account D) Unilateral payment account 6. Newstar, Inc., based in the U.S., exports products to a German firm and will receive E100,000 in six months. On February 1, the spot rate of the euro...
The current spot price of gold is $1200 per ounce. The riskless interest rate is 1%...
The current spot price of gold is $1200 per ounce. The riskless interest rate is 1% per month. For simplicity, assume there are no storage/security costs of gold. a) If you need to buy the gold in 8 months’ time, which position (long or short) will you take in the futures market to hedge the price risk of the gold? b) What is the arbitrage-free futures price for the delivery of gold in 8 months’ time? c) If you see...
(1 point) Consider a forward contract on a commodity with a current price of $750 and...
(1 point) Consider a forward contract on a commodity with a current price of $750 and delivery time in 6 months. Assume that the risk-free rate of interest is 3.5% compounded monthly. The carrying cost is $7 per month paid at the beginning of each month. Assume that today is the beginning of a month, and the carrying cost payment has not been made yet. a) Find the forward price of the commodity for delivery in 6 months: b) Find...
] Question 4 (10 marks) Suppose the spot price of gold is $1,500 per troy ounce...
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Question 4 (10 marks) Suppose the spot price of gold is $1,500 per troy ounce today. The futures price of gold for delivery in 1 year is $1,530 per troy ounce. Assume that the one-year gold futures contract is correctly priced and there are no storage and insurance costs. Also assume that the risk-free rate is compounded annually and you can borrow and lend money at the risk-free rate. a). What is the theoretical parity price of a two-year...
Question 1 - (25 points) (a) Consider a 2-year forward contract to buy a coupon-bearing bond...
Question 1 - (25 points) (a) Consider a 2-year forward contract to buy a coupon-bearing bond that will mature 2 year from today. The current price of the bond is $102. Sup- pose that on that bond 4 coupon payments of $6 are expected after 6 months, 12 months, 18 months and 24-months. We assume that the 6-month, 12- month, 18-month and 24-month risk-free interest rates (continuously com- pounded) are, respectively, 1%, 1.3%, 1.6% and 1.9% per annum. Determine the...
5. (a) Explain the differences between a forward contract and an option. [2] (b) An investor...
5. (a) Explain the differences between a forward contract and an option. [2] (b) An investor has taken a short position in a forward contract. If Sy is the price of the underlying stock at maturity and K is the strike, what is the payoff for the investor? Does the investor expect the underlying stock price to increase or decrease? Explain your answer. (2) (c) (i) An investor has just taken a short position in a 6-month forward contract on...
10. (Lecture Note 2) The current spot price of trader, can borrow money at 6% per year wit 3% per year with continuous compounding. The cu ne current spot price of silver is $16.75 per troy ounce. Sam Chatwick, a metals w money at 6% per year with continuous compounding and lend money (risk-free) at with continuous compounding. The current six-month forward price of silver is $17.13. Does Jarl have any arbitrage opportunities? If one does exist. use an arbitrare...
Today's spot price of gold is $1,650 per ounce. The quoted six-month forward price for gold is $1,700. The arbitrage profit that you can make today by trading one forward contract and other securities is $6. Assuming no storage cost, what could be the continuously compounded interest rate per annum? 5.26% 5.24% 6.68% 6.80%
NEW R 3. A Canadian company pays $300,000 consulting fee to a U.S. consulting company in San Diego. Which of the following account in the U.S. balance of payment statement will be affected by the cross-border transaction? A) Current account B) Capital account C) Foreign reserve account D) Unilateral payment account 6. Newstar, Inc., based in the U.S., exports products to a German firm and will receive E100,000 in six months. On February 1, the spot rate of the euro...
(1 point) Consider a forward contract on a commodity with a current price of $750 and delivery time in 6 months. Assume that the risk-free rate of interest is 3.5% compounded monthly. The carrying cost is $7 per month paid at the beginning of each month. Assume that today is the beginning of a month, and the carrying cost payment has not been made yet. a) Find the forward price of the commodity for delivery in 6 months: b) Find...
]
Question 4 (10 marks) Suppose the spot price of gold is $1,500 per troy ounce today. The futures price of gold for delivery in 1 year is $1,530 per troy ounce. Assume that the one-year gold futures contract is correctly priced and there are no storage and insurance costs. Also assume that the risk-free rate is compounded annually and you can borrow and lend money at the risk-free rate. a). What is the theoretical parity price of a two-year...
Question 1 - (25 points) (a) Consider a 2-year forward contract to buy a coupon-bearing bond that will mature 2 year from today. The current price of the bond is $102. Sup- pose that on that bond 4 coupon payments of $6 are expected after 6 months, 12 months, 18 months and 24-months. We assume that the 6-month, 12- month, 18-month and 24-month risk-free interest rates (continuously com- pounded) are, respectively, 1%, 1.3%, 1.6% and 1.9% per annum. Determine the...
5. (a) Explain the differences between a forward contract and an option. [2] (b) An investor has taken a short position in a forward contract. If Sy is the price of the underlying stock at maturity and K is the strike, what is the payoff for the investor? Does the investor expect the underlying stock price to increase or decrease? Explain your answer. (2) (c) (i) An investor has just taken a short position in a 6-month forward contract on...
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