What is the futures price of gold

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Reference no: EM131914086

Financial Derivatives and Risk Management Assignment -

ANSWER EACH question -

Q1. The spot price of gold is $1,300 and the continuously compounded risk-free interest rate is 5%. Assume that gold will not have any storage cost.

(1) What is the futures price of gold with 12-month maturity?

(2) If the futures price is quoted at $1,385, how can you make money through arbitrage? Please show all transactions.

Q2. Consider a 1-year forward contract on the IBM stock. Currently the stock is trading at $150 per share on the NYSE. The stock is expected to pay a cash dividend of $5 per share in six months. The continuously compounded interest rates are 5% for six months and 6% for 12 months.

(1) Calculate the fair price of the 1-year forward contract on the stock.

(2) If the actual forward is quoted at $152, can you identify an arbitrage opportunity? If yes, please complete all necessary transactions to realize the profit.

Reference no: EM131914086

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