Calculate range within which one-year silver forward prices

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Reference no: EM132001643

A trader owns silver as part of a long-term investment portfolio. The trader can buy silver today for $34 per ounce and sell silver today for $33 per ounce. The trader has indicated that there is no arbitrage opportunity if the lending rate is 8% p.a. (or less) and the borrowing rate is 9% p.a. (or more) with continuous compounding frequency. Assume that there is no bid-offer spread for forward prices, and that there is no storage cost and no convenience yield.

Required: Calculate the range within which the one-year silver forward prices must fall so that there is no arbitrage opportunity. Assume the trader can short sell silver if required.

Reference no: EM132001643

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