Question

Suppose that the platinum futures price is $1,580 per ounce and the gold futures price for a contract expiring in the same month as platinum is $1,500 per ounce.

a) Expecting that the spread will narrow to $50 in a month’s time, set up a spread trading strategy.

b) What are three possible ways that the spread can narrow to $50?

Answer 1

a)

Platinum futures price = $1580

Gold futures price = $1500

Current Spread = $80

We are expecting that spread will narrow to $50.

To take the benefit to same, trading strategy would be to sell futures will higher price and buy futures having lower price.

That is, sell platinum futures and buy gold futures.

b) three possible ways spread can narrow to $50:

1. Gold futures prices remains stable and Platinum futures price falls by $30

2. Platinum futures prices remains stable and Gold futures price increases by $30

3. Platinum futures prices fall and Gold futures prices increase such that spread between prices reaches $50.

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