Problem 1 Forwards. Suppose that silver currently trades for $15 per ounce and that you can store silver for two years at a price of $0. 10/ year, payable at t = 1 and t = 2. Silver provides no convenience yield. The term structure is at at 5% [year (EAR). (a) (5 points) Find F032, the forward price at t = 0 to buy the silver at T = 2 years? Solution: (b) (5 points) If silver had a convenience yield (everything else the same), would the forward price you compute above be higher or lower? No explanation is necessary. Solution: (0) (5 points) Suppose that at t = 0, you go short a forward contract to buy 100 ounces of silver. At t = 1, the price of silver falls to $10/ ounce (storage costs and interest rates stay the same.) Your counterparty declares bankruptcy and the contract is cancelled. Is this good or bad for you? What is the magnitude of the gain or loss to you due to the contract being cancelled