Spot Deferred Contract

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Spot Deferred Contract

Suppose that the gold price is 1300, LIBOR at 5%, and the gold lease is at 2% The forward rate is given by F=S(1+LIBOR-LEASE RATE).

A gold producer enters into an SDC to sell 200 OZ of gold to be delivered at the end of year one or two. If delivery does not take place at the end of the first year, a new price will be set in such a way that both parties are indifferent between rolling over the contract for another year or closing the SDC and initiating a new one year forward contract.

At the end of the first year the gold was at 1500/OZ Should the producer deliver the gold? Why or why not? lf the producer does not deliver at the end of the first year what should be the new price in the contract?

Reference no: EM133496057

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