(a) The bid and ask prices of physical platinum are currently trading at $1,050 / $1,060 per...
Question:
(a) The bid and ask prices of physical platinum are currently trading at $1,050 / $1,060 per troy ounce. The storage is charged $10 per troy ounce per year payable semi-annually in advance. The interest rate is 4.6% per annum.
Calculate the initial value and the fair bid and ask prices of a 12-month forward contract. (4 marks)
(b) Can you detect any arbitrage opportunity if a market maker has quoted the bid and ask prices of a 12-month platinum forward at $1,120 / $1,130?
Verify your trading positions taken at each point in time. (9 marks)
(c) A short position was executed at the forward price calculated in (a). After 8 months, the physical platinum price has risen 5% and the interest rate remains unchanged.
Determine the value of the short forward position. Is it a profit or loss? (3 marks)
(d) Are there any differences between futures and forward prices if futures prices are correlated to interest rates?
Explain your answer. (4 marks)
Fundamentals of Corporate Finance
ISBN: 978-1260153590
12th edition
Authors: Stephen M. Ross, Randolph W Westerfield, Robert R. Dockson, Bradford D Jordan