Suppose that the spot price of copper is $3.25 per pound, the continuously compounded lease rate for copper is 4%, and the continuously compounded risk-free rate is 2%. Suppose that copper can be stored at zero cost. a)If you short sell copper for one year, what is the total cash flow(including both the cost of returning the copper borrowed and any lease payment) to the copper lender at the end of the year? b)What is the 1-year forward price of copper?
Unitary Method
The word “unitary” comes from the word “unit”, which means a single and complete entity. In this method, we find the value of a unit product from the given number of products, and then we solve for the other number of products.
Speed, Time, and Distance
Imagine you and 3 of your friends are planning to go to the playground at 6 in the evening. Your house is one mile away from the playground and one of your friends named Jim must start at 5 pm to reach the playground by walk. The other two friends are 3 miles away.
Profit and Loss
The amount earned or lost on the sale of one or more items is referred to as the profit or loss on that item.
Units and Measurements
Measurements and comparisons are the foundation of science and engineering. We, therefore, need rules that tell us how things are measured and compared. For these measurements and comparisons, we perform certain experiments, and we will need the experiments to set up the devices.
Suppose that the spot price of copper is $3.25 per pound, the continuously compounded lease rate for copper is 4%, and the continuously compounded risk-free rate is 2%. Suppose that copper can be stored at zero cost.
a)If you short sell copper for one year, what is the total cash flow(including both the cost of returning the copper borrowed and any lease payment) to the copper lender at the end of the year?
b)What is the 1-year forward price of copper?
c)If there are no arbitrage opportunities, what is the maximum possible 1-year forward price for copper? If the forward price were above this level, how could you take advantage of it?
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