Correct futures price in no-arbitrage sense

Assignment Help Financial Management
Reference no: EM131978488

1. Consider the following scenario:

       Current spot price of gold = $450

       Current futures price for delivery in three months = $452

       Risk free rate = 4.85%

       Assume the following strategy:

a. We short sell one ounce of gold today and invest the proceeds at the risk free rate for three months.

b. We take a long futures position for three months for one ounce of gold

c. In three months when the futures contract matures, we retire the short sale, and our investment matures.

       Evaluate the cash flows for current period as well as for three months from now.

       Based on the above numbers, is $452 the “correct” futures price in a no-arbitrage sense?

       Explain.

Reference no: EM131978488

Questions Cloud

What is the nature of dividend policy : What is the nature of dividend policy and how does it affect the value of the firm.
Analyse the roles of cost and management : Each member of the group is to research the annual report (and corporate website for one major publicly listed Australian corporation
General markets based on their hedging position : Describe the investor’s implied price expectations in the midcap and general markets based on their hedging position.
What rights are given to the people of first ten amendments : What "rights" are given specifically to the people in any of the first ten amendments of the U. S. Constitution? Do the words actually say, or can you prove.
Correct futures price in no-arbitrage sense : Based on the above numbers, is $452 the “correct” futures price in a no-arbitrage sense?
Find the contract value : A corporation wants a three month forward contract to buy 1 million marks at the spot exchange rate of 0.54 $/DEM. Find the contract value.
Which alternative should the farmer pursue and why : A farmer currently holds 5000 bushels of corn. The risk free rate is 10% p.a. Which alternative should the farmer pursue and why?
Discuss challenges faced by leaders in the article : Find a recent media or news article on the Internet concerning budget issues a police or other public sector agency is currently facing.
How innovative was the water cube : Project - ARUP: Building the Water Cube. How innovative was the Water Cube? What specific practices and processes enabled the team's success

Reviews

Write a Review

Financial Management Questions & Answers

  What is the future value of this investment at end of year

What is the future value of this investment at the end of year five if 16.99 percent per year is the appropriate interest (discount) rate?

  What is the annual rate of return on your investment

What is the annual rate of return on your investment in Golden common stock if you purchased shares at the stock’s actual listed price of $65 per share?

  Considering investing dakota security services

You are considering investing Dakota's security services. You have been able to locate the following information on the firm.

  Finding the project terminal value of cash inflows

Obtain the project's MIRR, first by finding the project's terminal value (TV) of cash inflows:

  Balances in their liability and equity accounts

Suppose next year the Andrews Company generates $36,500,000 in Net Profit, pays $15,000,000 in dividends and total liabilities and common stock remain unchanged

  What was her approximate real rate of return on investment

Christina purchased 200 shares of stock at a price of $62.30 a share and sold them for $70.25 a share. She also received $148 in dividends. If the inflation rate was 4.2 percent, What was her approximate real rate of return on this investment? Over a..

  What should your companys stock sell for today

Assuming a required rate of return of 14%, what should your company's stock sell for today?

  Imagine you have created a new service or product using

imagine you have created a new service or product. using relevant entrepreneurship models including management

  What does that tell you about your tolerance for risk

You are loaned $100,000 to pick a stock with the stipulation that at the end of one year, you share the gains or losses 50/50 with the investor.

  Interest rate-perpetual stream

Given an interest rate of 7.05 percent per year, what is the value at Year 11 of a perpetual stream of $3,800 payments that begin at Year 18?

  Prepare a financial model

Prepare a financial model - Capital cost of product a is 5 crores and initial capital cost of product b is 3 crores. Life of product a is 30 years and life of product b is 10 years.

  Because of the increased scrutiny on actions of

introductionbecause of the increased scrutiny on the actions of corporations and those who act on behalf of

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd