Question

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

Answer 1

  

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Future Price = (Spot price + PV of Storage Cost) * e^(r*t)

r = 0.04

t = 2 / 12 = 0.16666666666

= (1975 + 1.80 + 1.80*e^(-0.04*1/12)) * e^(0.04*0.16666666666)

= (1975 + 1.80 + 1.80*0.99667221605) * 1.00668893835

= 1978.59400998 * 1.00668893835

= 1991.83

It is closest to $1,989.51

Option 1 is correct.

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