The current price of gold is $300 per ounce. Carrying costs in total are 0.5% (not including interest) of the gold value payable in 6 months time. If the interest rate is 8%, is there an arbitrage opportunity if the gold futures price for delivery in six months is $310 per ounce? B. If an arbitrage opportunity exists, explain how you would conduct it and calculate the arbitrage profit. C. Why is it not possible in reality to perfectly hedge a portfolio using Options and/or futures Instruments?
The current price of gold is $300 per ounce. Carrying costs in total are 0.5% (not including interest) of the gold value payable in 6 months time. If the interest rate is 8%, is there an arbitrage opportunity if the gold futures price for delivery in six months is $310 per ounce? B. If an arbitrage opportunity exists, explain how you would conduct it and calculate the arbitrage profit. C. Why is it not possible in reality to perfectly hedge a portfolio using Options and/or futures Instruments?
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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The current price of gold is $300 per ounce. Carrying costs in total are 0.5% (not
including interest) of the gold value payable in 6 months time. If the interest rate is
8%, is there an arbitrage opportunity if the gold futures price for delivery in six months
is $310 per ounce?
B. If an arbitrage opportunity exists, explain how you would conduct it and calculate the
arbitrage profit.
C. Why is it not possible in reality to perfectly hedge a portfolio using Options and/or
futures Instruments?
D. Explain the shortcomings of LTCM’s financial strategy that led to its eventual
downfall.
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