Question

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?

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