The spot price of silver is $30 per ounce. The continuously compounded interest rate is 6% per year. The quoted six-month forward price for silver is $32. (a) What should the arbitrage-free forward price of silver for a forward contract ma- turing in six months? (b) How would you arbitrage any mispricing?

The spot price of silver is $30 per ounce. The continuously compounded interest rate is 6% per year. The quoted six-month forward price for silver is $32. (a) What should the arbitrage-free forward price of silver for a forward contract ma- turing in six months? (b) How would you arbitrage any mispricing?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 32QA

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Concept explainers

Cost of Credit

The cost of credit is an extra amount that the borrower has to pay besides the loan amount. These credit charges may vary from loan to loan. The cost of credit includes interest charges, maintenance charges, and arrangement charges. Some of the costs are mandatorily collected by the lender based on the loan amount and tenure of the loan. The cost of credit is also called finance charges of the credit.

Question

Problem 2: Cost-of-Carry Model.

The spot price of silver is $30 per ounce. The continuously compounded interest rate is 6% per year. The quoted six-month forward price for silver is $32.

(a) What should the arbitrage-free forward price of silver for a forward contract ma- turing in six months?

(b) How would you arbitrage any mispricing?

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