Calculate the forward price of gold for delivery

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Suppose that the current price of gold is $365 per oz and that gold may be stored costlessly. Suppose also that the term structure is at with a continuously compounded rate of interest of 6% for all maturities.

(a) Calculate the forward price of gold for delivery in three months.

(b) Now suppose it costs $1 per oz per month to store gold (payable monthly in advance). What is the new forward price?

(c) Assume storage costs are as in part (b). If the forward price is given to be $385 per oz, explain whether there is an arbitrage opportunity and how to exploit it.

Reference no: EM132634899

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