Question

Prices of bond futures can be used to access the markets expectations about future interest rates and therefore can be used as the basis for pricing other financial securities. A 10-year annual coupon bond with face value $1,000 is currently selling for $919. The futures price of this bond for delivery in 1 year is $888. The bond pays coupon of $88 annually. Assume that the coupon is paid before the delivery of the bond.

(a) What is the 1-year interest rate implied by the spot and futures prices of bonds? (Hint: Recall the PV formula of bond prices for a one-year horizon.)

(b) In the gold futures market, the spot price of gold is $1337 per ounce. There is no storage cost. What is the futures price per ounce of gold for delivery in one year? Suppose there is no uncertainty in interest rates.

(c) Suppose your friend Emily has also longed a forward contract on gold for delivery one year from now. But the contract was entered last year. The forward price she locked in was $1375. Clearly her contract is valuable now because the gold price has risen since last year, and no one is able to lock in such a low price now. What is the maximum amount you would pay now for having her contract? Does it violate the proposition that forward and futures contracts should have zero value at the time of initiation? Explain.

(d) A jewelry producer just received an order that is worth $1 million from a department store for gold necklaces to be delivered in 6 months. The producer will be paid in 6 months. He cant buy gold now because he cant afford the storage cost. Suppose the gold necklaces can be produced instantaneously. What is the risk of the producer? What hedging strategy would you recommend to him? Explain briefly why the strategy would work.

Answer #1

a) INT= 88

Bond Value= 888

Face Value of Bond: 1000

888= 88/(1+x) +1000/(1+x)

1+x= 1088/888

x= 22%

b) Gold Spot Price= 1337

Furtures price for delivery after one year = 1337/1.22 = 1095.902

c) Emily has longed a forward contract/ It means she has agrred to buy gold at 1375. The current price of Gold is 1337 and discount rate id 22%. I will pay maximum (1375-1095.92) for a short position

d) The gold jewnelyyer maker has a risk of flucuating gold prices. He should book a forward contract a suitable price vis-a vis the revenue he is generating by selling the gold jewellery. He risk he still runs is that what if the gold price still go below than what he booked for

Prices of bond futures can be used to access the markets
expectations about future interest rates and therefore can be used
as the basis for pricing other financial securities. A 10-year
annual coupon bond with face value $1,000 is currently selling for
$919. The futures price of this bond for delivery in 1 year is
$888. The bond pays coupon of $88 annually. Assume that the coupon
is paid before the delivery of the bond.
(a) What is the 1-year...

1. If futures prices are lower than the expectations of spot
prices in the future,
a.
Hedgers and speculators will take the same positions
b.
Speculators will take a net long position
c.
Speculators will take a net short position
d.
Hedgers will take a net long position
2. Which of the following statements is true about emerging
technologies and innovations in the financial sector
a.
They will increase the number of intermediaries who help
facilitate the provision of financial...

Question 19 Revision booklet:
Assume that the spot price of gold is $1,500 per ounce, the
risk-free interest rate is 2%, and storage and insurance costs are
zero.
a) What should be the forward price of gold for delivery in 1
year?
b) If the futures price is $1550, develop a strategy that can
bring risk-free arbitrage profits.
c) Calculate the profit that you can make by following that
arbitrage strategy.

When the foreign exchange (FX) futures market is used for price
discovery:
One will generally not see steadily appreciating or depreciating
pricing patterns, with price discovery occurring on contract
expiration dates in the FX market.
FX forward prices are subjective predictors of future spot
exchange rates.
The pattern of the prices of these contracts provides
information as to the market’s current belief about the relative
future value of one currency versus another at the scheduled
expiration dates of the contracts....

Assume that the only cost (or opportunity cost) associated with
gold is the “interest on the money” if you own gold. There are no
storage costs and the convenience yield is zero. Suppose you can
borrow or lend money at 10 percent per annum (continuous
compounding) if you buy / sell gold. Today's price of gold is
$1,320 per ounce, and there are also gold futures contracts
available. The 6-month gold futures is trading at $1,370 and the
12-month gold...

Consider a forward contract on gold. Each contract covers 100
ounces of gold and matures one year from now. Suppose it costs $2
per ounce per year to store gold with the payment being made at the
end of the year. Assume that the spot price of gold is $1300 per
ounce, the continuously compounded risk-free interest rate is 4%
per annum for all maturities.
a) In the absence of arbitrage, find the current forward price.
Show your calculations.
b)...

Consider a forward contract on gold. Each contract covers 100
ounces of gold and matures one year from now. Suppose it costs $2
per ounce per year to store gold with the payment being made at the
end of the year. Assume that the spot price of gold is $1300 per
ounce, the continuously compounded risk-free interest rate is 4%
per annum for all maturities.
a) In the absence of arbitrage, find the current forward price.
Show your calculations.
b)...

Briefly describe how the marked-to-market process works with
future contracts. Feel free to illustrate with an original example
(2 points)
Suppose that a futures contract is drawn up in January for the
delivery of 1000 troy ounces of gold in July at $1,500/troy ounce.
The current spot price of gold is $1,400/troy ounce. What is the
value of this futures contract to the seller? What, if anything, do
you expect to happen between buyer and seller of the futures
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Suppose the current price of gold is $250 per ounce and that the
future spot price one year from now is projected to be $350. Assume
a riskless rate of 8%.
If storage costs are 3%, what rate of return do you earn on your
gold if you sell it after one year?
How could you take your $250 and instead invest in a synthetic
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38. Suppose the current price of gold is $250 per ounce and that
the future spot price one year from now is projected to be $350. (7
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a. If storage costs are 3%, what rate of return do you earn on
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b. How could you take your $250 and instead invest in a
synthetic form of gold (from an investment perspective)? (What
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