Gold sells at $1,209.10 per ounce. It has a convenience yield denoted by y and a

storage cost u = 4% (per annum continuously compounded). The risk-free interest rate

is 3% per annum continuously compounded. The 6-month futures price is $1,243.7441.

An Alternative Investments fund takes 50 long positions in the 1- year futures contract

on gold today. Each contract is on 100 ounces.

(a) What is the convenience yield? (2 marks)

(b) Suppose that the hedge fund closes out its positions 8 months from now and makes

a total gain of $75,000. What is the spot price of gold 8 months from now if there is no

arbitrage?

Answer rating: 100% (QA)

To solve this problem we need to use the noarbitrage pricing relationship for futures contracts a Ca... View the full answer