(SOLVED) Assuming that you are going for a 1 year Long Forward contract on 1,000 Gold bullions that is currently priced at $25,000 each bullion.
Type of Paper: Question-Answer
Academic Level: Undergrad. (yrs 1-2)
Paper Format: APA
Assuming that you are going for a 1 year Long Forward contract on 1,000 Gold bullions that is currently priced at $25,000 each bullion. The storage cost will be $400 each bullion for 1 year and to be paid in advance half yearly. The risk free interest rate is 10% p.a. for all maturities.
If the 1-year forward price of each
Gold bullion is quoted as $28,060.57, what will be the arbitrage
profit for each bullion?
Expert Solution Preview
Current price (So) = $25,000
Storage cost = $400
Risk free rate (r) = 10% or 0.10
Actual forward price = $28,060.57
Time (t) = 1
The present value (PV) of Storage cost (U) is given by:
U = Storage cost x e^(-rt)
U = ............
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