The spot price of silver is $25 per troy ounce. The forward price for delivery in one

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The spot price of silver is $25 per troy ounce. The forward price for delivery in one year is $27.50 per troy ounce. Storage costs is $2 per troy ounce payable annually in advance. An arbitrageur can borrow money at 3% per annum. Assume continuous compounding and no convenience value.

a. Would there be an arbitrage opportunity in the absence of the storage costs? If so, show the arbitrage strategy, and calculate its potential profits.

b. Is there an arbitrage opportunity in the presence of the storage costs? Demonstrate your conclusion.

c. If storage costs are assessed, how high must the futures price be to allow for an arbitrage opportunity?

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Risk Management and Financial Institutions

ISBN: 978-1118955949

4th edition

Authors: Hull John

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Posted Date: Feb 08, 2024 08:42 AM

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The spot price of silver is $25 per troy ounce. The forward price for delivery in one

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a To determine if there is an arbitrage opportunity in the absence of storage costs we compare the spot price with the forward price The spot price of ... View the full answer

Risk Management and Financial Institutions

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