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**

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 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 $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 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
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 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 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 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 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 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.

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