(SOLVED) Assuming that you are going for a 1 year Long Forward contract on 1,000 Gold bullions that is currently priced at $25,000 each bullion.

Discipline: Finance

Type of Paper: Question-Answer

Academic Level: Undergrad. (yrs 1-2)

Paper Format: APA

Pages: 1 Words: 134

Question

Assuming that you are going for a 1 year Long Forward contract on 1,000 Gold bullions that is currently priced at $25,000 each bullion. The storage cost will be $400 each bullion for 1 year and to be paid in advance half yearly. The risk free interest rate is 10% p.a. for all maturities.

If the 1-year forward price of each Gold bullion is quoted as $28,060.57, what will be the arbitrage profit for each bullion?

A. $0.00

B. $31.29

C. $66.03

D. $250.00


Expert Solution Preview


Given information:


Current price (So) = $25,000


Storage cost = $400


Risk free rate (r) = 10% or 0.10


Actual forward price = $28,060.57


Time (t) = 1


The present value (PV) of Storage cost (U) is given by:


U = Storage cost x e^(-rt)

U = ............