Assume you have observed the following information for a commodity: 

Spot price for commodity	$150
Forward price for expiring in 1 year	$162
Interest rate for 1 year	5% p.a. semi-annual compounding
Storage cost	$1.5 p.a. payable semi-annually in arrears

Part I.

Explain why it is important to differentiate investment assets and consumption assets in regards to forward price determination.

 

Part II.

Given the above information, if you identify an arbitrage opportunity, present your strategy to take it. If you believe there might not be an arbitrage opportunity, explain why. 

 

 

Part III.

Assume instead you observe the following information:

Spot price for commodity	$150
Forward price for expiring in 1 year	$155
Interest rate for 1 year	5% p.a. semi-annual compounding
Storage cost	$1.5 p.a. payable semi-annually in arrears

Given the  information, if you identify an arbitrage opportunity, present your strategy to take it. If you believe there might not be an arbitrage opportunity, explain why. 

Answer rating: 100% (QA)

Part I It is important to differentiate investment assets and consumption assets in regards to forward price determination because the two types of as... View the full answer