A trader owns a commodity that provides no income and has no storage costs as part of a long-term investment portfolio. The trader can buy the commodity for $1250 per ounce and sell it for $1245 per ounce. The trader can borrow funds at 6% per year and invest funds at 3% per year. (Both interest rates are expressed with continuous compounding.) For what range of one-year forward prices does the trader have no arbitrage opportunities? Assume there is no bid–offer spread for forward prices. Between 1245 and 1250 Between 1288 and 1321 Between 1283 and 1327 None of the above
A trader owns a commodity that provides no income and has no storage costs as part of a long-term investment portfolio. The trader can buy the commodity for $1250 per ounce and sell it for $1245 per ounce. The trader can borrow funds at 6% per year and invest funds at 3% per year. (Both interest rates are expressed with continuous compounding.) For what range of one-year forward prices does the trader have no arbitrage opportunities? Assume there is no bid–offer spread for forward prices. Between 1245 and 1250 Between 1288 and 1321 Between 1283 and 1327 None of the above
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
A trader owns a commodity that provides no income and has no storage costs as part of a long-term investment portfolio.
The trader can buy the commodity for $1250 per ounce and sell it for $1245 per ounce.
The trader can borrow funds at 6% per year and invest funds at 3% per year. (Both interest rates are expressed with continuous compounding.)
For what range of one-year forward prices does the trader have no arbitrage opportunities? Assume there is no bid–offer spread for forward prices.
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Between 1245 and 1250 |
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Between 1288 and 1321 |
||
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Between 1283 and 1327 |
||
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None of the above |
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