The current spot price of one pound (lb) of copper is $3.75, the 3.5-year spot rate is 2% (semi-annual compounding), the (continuous flow of) storage costs of copper is 3% per year. (a). In absence of arbitrage, what should be the forward price to trade copper in 3.5 years if copper was an investment asset? (b). Since copper is a consumption asset, it might be impossible or undesirable to short sell it in the spot market. Does the result/formula in question a) still hold? Explain carefully. (c). Assume copper is a consumption asset. Is there an arbitrage if the forward price to trade copper in 3.5 years is $5? If so, describe an arbitrage strategy. (d). What is the convenience yield if the true forward price to trade copper in 3.5 years is $3.78?

The current spot price of one pound (lb) of copper is $3.75, the 3.5-year spot rate is 2% (semi-annual compounding), the (continuous flow of) storage costs of copper is 3% per year. (a). In absence of arbitrage, what should be the forward price to trade copper in 3.5 years if copper was an investment asset? (b). Since copper is a consumption asset, it might be impossible or undesirable to short sell it in the spot market. Does the result/formula in question a) still hold? Explain carefully. (c). Assume copper is a consumption asset. Is there an arbitrage if the forward price to trade copper in 3.5 years is $5? If so, describe an arbitrage strategy. (d). What is the convenience yield if the true forward price to trade copper in 3.5 years is $3.78?

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.
Assume a risk-free asset in the U.S. is currently yielding 2.7 percent while a Canadian risk-free asset is yielding 2.8 percent and the current spot rate is Can$1.2849 = $1. What is the approximate 6-month forward rate if interest rate parity holds? Can$1.2855 Can$1.2838 Can$1.2843 Can$1.2862 Can$1.2836
The two machines shown are being considered for a chip manufacturing operation. Assume the MARR is a real return of 11% per year and that the inflation rate is 6.1% per year. Мachine First Cost, $ M&O, $ per year Salvage Value, $ Life, years A В -148,000 -70,000 40,000 5 -1,060,000 -5.000 200,000 00 Problem 14.056.a: Compare two alternatives based on their AW values without inflation consideration Which machine should be selected on the basis of an annual worth analysis if the estimates are in constant-value dollars? What is the annual worth of the selected alternative? Select machine A The annual worth of the alternative is $ -121600
A project costs Can$700,000 and has expected annual cash inflows of Can$300,000 for Years 1 through 3. The Canadian discount rate is 10 percent. The current spot rate is: $1 = Can$1.07. What is the NPV of this project in U.S. dollars using the foreign currency approach?
The price of gold is currently $1700 per ounce. The forward price for delivery in one year is $1800. An arbitrageur can borrow money at 5% per annum. What should the arbitrageur do? Assume that the cost of storing gold is zero and that gold provides no income.
Suppose you have a 2.5-year remaining on an interest rate swap with a notionalprincipal of $10, 000, 000 between Company A and Company B. Company A pays fixed rateand Company B pays the float rate. Fixed and float payments are exchanged every year andthe last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and thefloating rate is tied to the annual LIBOR. The previous 1-year LIBOR rate, set 6 months ago,is 2.75%, 6 month LIBOR is 3.25%. the 1.5-year LIBOR is 3.25%, and the 2.5-year LIBOR is3.50%.Calculate the present value of the fixed and floating legs of the swap, and determine the swap’snet present value from Company A’s perspective. Assume annual compounding for discounting.
A UK oil trader, Teresa, is considering purchasing oil on the spot market for speculative purposes. The current spot price is $18 a barrel. However, she expects the price to decline to $16 a barrel in one month's time. If she bought on the spot market today, she would hold the oil for one month at a cost of £0.002 a barrel for the month, after which she could sell the oil on the spot market. The current US dollar exchange rate is $1.50/£. If she expects the exchange rate to be $1.30/£1 in one month's time, what is her expected gain/loss on the oil deal? A. £0.306 gain per barrel B. £0.027 gain per barrel C. £1.540 loss per barrel D. £6.202 loss per barrel
A new investment offers TimeTek future cash flows of $Q in six years and SP in 12 years. Assuming a negative interest rate of throughout the entire time, TimeTek will pay up to $50,000 today to receive these future cash flows. If the interest rate becomes zero (r=0%), what will TimeTek be willing to pay for these same cash flows $Q and SP? O Less than $50,000 O $50,000 O Not enough information to determine More than 50,000
A U.S. investor purchases a 30-day Euro-commercial paper with a par value of 10,000,000 Brazilian reals for a price of 9,970,000 Brazilian reals. If the real is worth $0.28, the spot rate is anticipated to be $0.288900 per real at the end of maturity, and Investor holds the Euro- commercial paper until then, assuming a 360 day year, the effective yield is: Please show work
Consider the following two mutually exclusive investments allernatives: Suppose that your firm needs either machine for only two years. The net proceeds from the sale of machine B are estimated to be $200. What should be the required net proceed from the sale of machine A in two years so that both machines could be considered economically indifferent at an interest rate of 10%?(a) $750(b) $780(c) $800(d) $850
Question(3): A power plant is being considered in the dead sea location. For an initial investment of $170 million, annual net revenues are estimated to be $15 million in years 1–5 and $20 million in years 6–20. Assume no residual market value for the plant. a. What is the simple payback period for the plant? b. What is the discounted payback period when the MARR is 4% c. Using an equivalency technique (FW, PW, or AW), MARR is 4P% per year, would you recommend investing in this project? per year?
(i) Databank holds ¢460million T-Bill but it needs cash to settle an investor whose investment has matured and is expected to be paid ¢400 million. You have been asked to approach Ecobank to sell the T-Bill for ¢415 million on the morning of 19th May, 2008 with agreement to repurchase the bill on the evening of 23rd May, 2008. What is the cedi cost of this transaction to Databank? What is the Repo Rate on this transaction?

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