Show the equilibrium forward price

Reference no: EM131797451

Question: Suppose that copper costs $3.00 today and the continuously compounded lease rate for copper is 5%. The continuously compounded interest rate is 10%. The copper price in 1 year is uncertain and copper can be stored costlessly.

1. If you short-sell a pound of copper for 1 year, what payment do you have to make to the copper lender? Would it make sense for a financial investor to store copper in equilibrium?

2. Show that the equilibrium forward price is $3,154.

3. In what sense is $3,316 (= 3 x e^0.10) a maximum possible forward price?

4. Explain the circumstances in which any price below $3,316 could be the observed forward price, without giving rise to arbitrage. (Be sure to consider the possibility that the lease rate may not be 5%.)

Reference no: EM131797451

Questions Cloud

Changes in the manufacturing industry in malaysia : An article about the changes in the manufacturing industry in Malaysia , how it grows and how it effects the GDP

Economic policies and becoming prosperous as a result : Where do we see countries starting to embrace liberal economic policies and becoming prosperous as a result

What is its charitable contribution deduction : The clothes have a fair market value of $200,000 and a basis to the corporation of $75,000. What is its charitable contribution deduction

How does the construct of emotional intelligence : How does the construct of emotional intelligence that is presented in the article by Daniel Goleman add to your perspective?

Show the equilibrium forward price : Suppose that copper costs $3.00 today and the continuously compounded lease rate for copper is 5%. The continuously compounded interest rate is 10%.

Construct the null and the alternative hypotheses : Compute the value of the test statistic under the assumption that the variability of selling time for the SUVs and the small cars is the same.

Discuss the following for each country : Discuss the following for each country: At least two products that have provided the country an absolute advantage in trade (if any).

How might such behavior be avoided in the future : Compensation of senior management is often tied to earnings per share or return on equity. How might such behavior be avoided in the future

Demand to address a predetermined goal : Be clear on what the current market indicates and why and what your future goal is. We will probably revisit some of your choices in future modules.

User Account

All Pages