Question

**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.

Answer #1

The spot price of gold is $1,975 per ounce. Gold storage costs
are $1.80 per ounce per year payable monthly in advance. Assuming
that continuously compounded interest rates are 4% per year, the
futures price of gold for delivery in 2 months is closest to:
Select one:
$1,989.51
$1,988.51
$1,975.51

3. You observe that the current spot price of gold is TL400 per
ounce. You also observe that the yield curve is flat and all
maturities up to one year have an interest rate of 12 percent.
Since gold is a popular underlying asset in the derivatives
markets, you are interested in identifying any mispricing that may
allow you to earn arbitrage profits. When you look up gold forward
contract prices, you see that there is a contract with a...

The spot of gold is currently $1,970 per ounce. The forward
price (long or short) for delivery in one year is $1,980. An
arbitrageur can borrow or invest money at 4% (semi-annual
compounding rate). What should the arbitrageur do? Assume that the
cost of storing gold is zero and that gold can be borrowed for a
cost based on the spot price of 1% semi-annual, payable in cash
when the gold is returned.

The spot price of gold today is $1,505 per ounce, and
the futures price for a contract maturing in seven months is $1,548
per ounce. Suppose ACG puts on a futures hedge today and lifts the
hedge after five months. What is the futures price five months from
now? Assume a zero basis in your answer.

Suppose the spot price of gold is $300 per ounce and the
one-year forward price is $350. Assume the riskless interest rate
is 7%. (4 pts.)
What is the implied cost of carrying the gold?
What is the implied storage cost of the gold?

Suppose that the spot price for gold is $300 per ounce. If the
storage costs are 0.02 per year and the riskless rate is 0.07 per
year: (4 pts.)
What is the forward price of gold after one year?
What would happen if the price of gold were greater than what
you calculated in section (a)?

The spot price of gold is currently $1200. The current futures
price with 6 months to maturity $1300. The annual interest rate
with semi-annual compounding is 6%. There are no storage costs.
What arbitrage profit can be made?

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?

The spot price of silver is $25 per ounce. The storage costs are
$0.24 per ounce per year payable quarterly in advance. Assuming
that interest rates are 5% per annum for all maturities, calculate
the futures price of silver for delivery in nine months.

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...

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