Reference no: EM133120921
1. Spot price of gold is $1,875.00/oz. The total interest rate on three-month loans and deposits is 1.20%. The storage cost is $49.50/oz per year prorated for the length of the storage period and paid upfront.
Assuming no transaction cost, determine the no-arbitrage price for a gold futures contract maturing three months from now.
Note. Round all results to four decimal places.
2. Spot price of silver is $17.7500/oz. The interest rate on four-month loans and deposits is quoted at 1.00%. The cost of storage is $0.0213/oz per month paid upfront for the entire storage period. A four-month silver futures contract is currently traded at $18.0550/oz.
A. First, assume that money can be borrowed and deposited at the quoted rate and there is no transaction cost. Find the no-arbitrage price for a silver futures contract maturing four months from now and determine whether an arbitrage opportunity is present in the market.
B. Now assume that loans are charged an interest rate 0.36% above the quoted rate, while deposits earn 0.28% below the quoted rate, but there is no transaction cost involved. Determine the no-arbitrage bounds for the four-month futures price. Does the actual futures price of $18.0550/oz still represent an arbitrage opportunity? If not, explain why.
C. Lastly, assume that, in addition to the difference in borrowing and lending rates given in part b., all sales and purchases of the physical commodity incur a 1.10% handling fee (i.e. an additional charge that both buyers and sellers have to pay). Determine the no-arbitrage bounds for the four-month futures price under these conditions. Does the actual futures price of $18.0550/oz still represent an arbitrage opportunity? If not, explain why. Notes: Handling fee is an example of transaction cost. Round all results to four decimal places.
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