Consider a one year futures contract on gold. Suppose that it costs sh 3.5 per ounce per year to store gold, with the payment being made at the end of the year. Assume the spot price is sh 5,000 and the risk free rate is 9% per annum for all maturities;

a)Determine the future price of the gold.

b)Show the arbitrage profit if the forward price is both high and low than the calculated.

Answer rating: 100% (QA)

To determine the future price of the gold we can use the costofcarry model which takes into account the spot price the cost of carry and the riskfree ... View the full answer