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A mining company is planning a bond issue. Its financial advisors have advised the company to issue gold options along with the bonds. Each option would allow the bond holder to buy 10 ounces of gold at $484 per ounce. The options have a maturity of 1 year and are European.
Below is some data:
Spot gold price 435.74Maturity of Option 1 yearInterest Rate 6.0%, continuously compoundedFutures price for Gold 442.00Maturity of Futures Contract ½ yearVolatility of Gold 22% per year
a) Using the futures information, extract the convenience yield for gold.
b) Write down the formula that you would use to price the call option and make sure you identify the values for all inputs. Then compute the price of the option.
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