What is the arbitrage-free forward price of gold

Reference no: EM133516080

Homework: Individual Position

In this homework, you will solve problems on pricing forwards and futures.

Task

I. The spot price of silver is currently $7.125/oz, while the two- and five-month forward prices are $7.160/oz and $7.220/oz, respectively.

1. If silver has no convenience yield, what are the implied repo rates?

2. Suppose silver has an active lease market with lease rate = 0.5% for all maturities expressed in annualized continously compounded terms. Using the formula developed, identify the implied repo rate for maturities of two months and five months.

II. There is an active lease market for gold in which arbitrageurs can short or lend out gold at a lease rate of = 1%. Assume gold has no other costs/benefits of carry.

Consider a three-month forward contract on gold.

1. If the spot price of gold is $360/oz and the three-month interest rate is 4%, what is the arbitrage-free forward price of gold?

Suppose the actual forward price is given to be $366/oz. Is there an arbitrage opportunity? If so, how can it be exploited?

Reference no: EM133516080

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