Question

Suppose the current price of gold is $250 per ounce and that the future spot price...

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 form of gold (from an investment perspective)? (What actions would you need to take, including in terms of buying/selling?)

Using the storage costs from section (a) above, what would be the forward price of the gold in this case?

Homework Answers

Answer #1

If storage costs are 3%, what rate of return do you earn on your gold if you sell it after one year?

Gold price = $ 250

Storage costs = 3%

Storage costs = $7.50

Total Cost = $ 257.5

Selling Price = $ 350

Rate of Return = (350 -257.5 ) / 257.5 *100

Rate of Return = 35.92 %

How could you take your $250 and instead invest in a synthetic form of gold (from an investment perspective)? (What actions would you need to take, including in terms of buying/selling?)

We should buy the spot gold and short the futures. because future price is overpriced .

Using the storage costs from section (a) above, what would be the forward price of the gold in this case?

Forward Rate = 250 + Interset Saved + Storage Cost Saved

Forward Rate = 250+ 8% of 250 +3% of 250

Forward Rate =250+20+7.50

Forward Rate =277.50

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
38. Suppose the current price of gold is $250 per ounce and that the future spot...
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 pts.) a. If storage costs are 3%, what rate of return do you earn on your gold if you sell it after one year? b. How could you take your $250 and instead invest in a synthetic form of gold (from an investment perspective)? (What actions would you need to take, including in...
Suppose that the spot price for gold is $300 per ounce. If the storage costs are...
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)?
Suppose the spot price of gold is $300 per ounce and the one-year forward price is...
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?
The spot price of gold is $1,975 per ounce. Gold storage costs are $1.80 per ounce...
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
Question 19 Revision booklet: Assume that the spot price of gold is $1,500 per ounce, the...
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.
The spot of gold is currently $1,970 per ounce. The forward price (long or short) for...
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.
3. You observe that the current spot price of gold is TL400 per ounce. You also...
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...
Suppose silver is selling for $18 (spot price) an ounce and it costs $1 an ounce...
Suppose silver is selling for $18 (spot price) an ounce and it costs $1 an ounce to store silver for 1 year (payable at the end of the year). If you can borrow or lend at 12% per year, what should the one-year futures price of silver be if there are no riskless profits to be made? What would you do to make riskless profits if the futures price was actually $23?
The spot price of gold today is $1,505 per ounce, and the futures price for a...
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.
The spot price of silver is $25 per ounce. The storage costs are $0.24 per ounce...
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.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT