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

See similar textbooks

Related questions

Q: What annual payment is required to pay off a four-year, $29,000 loan if the interest rate being…

A: Loan amount (L) = $29000 Let the annual payment = A Monthly payment = M EAR = r = 7% Let monthly…

Q: Suppose that the US treasury issues a Treasury bill with a one-year maturity. The T-bill sells in…

A: Current price of a security maturing in year 1 is known. The yield to maturity is to be determined.

Q: On the London Metals Exchange, the price for copper to be delivered in one year is $5,740 a ton.…

A: Expected rate of return(r)=Risk free interest rate+Beta×Expected market return-Risk free interest…

Q: person owes a credit institution $20,000 that must be paid in 3 years with interest at 12% effective…

A: A person owes a credit institution $20,000 and must be paid in 3 years at 12% effective rate and…

Q: What is the approximate annual cost of foregoing the cash discount if the credit term is 2/15, net…

A: The company pays the amount on the 50th day. Credit term = 2/15, net 45 days. This credit term…

Q: Which is the answer?show steps with your formulas. Thank you

A: Net present value: It is the difference between the preset value of cash inflow and the present…

Q: A Treasury bill has a bid yield of 2.75 and an ask yield of 2.73. The bill matures in 152 days.…

A: A Treasury bill is a government-backed money market security that yields a risk-free return for a…

Q: You pay $1,000 today for the following series of monthly cash flows: 150 0 200 15 300 300 0 100 100…

A: Present Value of Each Cash Flow: We'll use the formula for the Present Value (PV) of a future cash…

Q: Assume a continuously compounding dollar interest rate of 5%. If you long a 1-year forward contract…

A: Forward price is the price of the underlying asset which needs to be paid on a predetermined date.…

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?

Video Video

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction

VIEW

Step 2: Calculation of arbitrage free forward price

VIEW

Step 3: Explanation of arbitrage mispricing

VIEW

Solution

VIEW

Step by step

Solved in 4 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Question: (Pricing a forward contract with dividends) The current price of silver is $206 per ounce. The storage cost is $1 ounce per year, payable quarterly in advance. Assuming a constant annual interest rate of 9% compounded quarterly, what is the theoretical forward price of silver for delivery in 9 months? Please submit your answer rounded to the nearest integer - for example, if your answer is 19.819, round it to either 20.
Question: (Pricing a forward contract with dividends) The current price of silver is $206 per ounce. The storage cost is $1 ounce per year, payable quarterly in advance. Assuming a constant annual interest rate of 9% compounded quarterly, what is the theoretical forward price of silver for delivery in 9 months? please provide the theoretical forward price of silver for delivery in 9 months. thank you so much for the help, much appreciated!!
a. If the spot price of gold is $980 per troy ounce, the risk-free interest rate is 7%, and storage and insurance costs are zero, what should be the forward price of gold for delivery in one year? (Round your answer to 2 decimal places.) Forward price b. Calculate risk-free arbitrage profits if the forward price is $1,080. (Round your final answer to nearest whole dollar amount.) Profit
Tyson Inc. wants to hedge an account receivable of ¥595 million to be received in six months using a money market hedge. Given a yen borrowing rate of 6% APR how much will Tyson Inc. need to borrow today in order to match the payment it will receive in six months? Question 7 options: ¥577.7 million ¥595 million ¥561.3 million ¥586.2 million
Use the following spot rates to answer the following questions. Maturity Spot rate (%) 1 year 4.93% 2-years 4.47% 3-years 4.12% 5-years 3.84% 10-years 3.68% Assume that Citibank is offering to sell a one-year Treasury bill next year with a rate of 5% (i.e., you can enter into a contract today to lock in a 5% return on a one-year security purchased/sold next year). Based on the above spot rates, does the Citibank offer generate any arbitrage opportunities? If so, compute the total $ profits that can be generated from this opportunity, specifying the steps you would take. Assume you will borrow/invest $1,000. O Yes: profit of $5.55/ $1000 borrowed. O No: $0 O No: Loss of $5.55/ $1000 borrowed.based on Citibank's offered rate. O Yes: $55.55/$1000 borrowed.
Bank K is about to sign a loan agreement with a mining company.The current LIBOR rate is 8%.The risk premium for the company has been estimated as 3% and the origination fee will be 0.1875 percent.The bank will be requesting a 9% compensating balance requirement.If the reserve requirement is 6%,what is the promised gross return on the loan?
Yield Calculation i. Assume that newly issued three - month (90 days) T - bills with a par value of $1,000 sells at discount rate of 3%. a) What is the price of this three -month T-bills? b) What is the 90-day holding period return of this T - bill? c) What is the annualized yield of this three-month T - bill? ii. Assume that an investor purchased a three-month commercial paper with a face value of $1,000,000 for $940,000. This investor held the commercial paper for 60 days before he sold it at a price of $980,000. What is the annualized yield of this investment? iii. Assume that Canada is in a strong economic condition, and you expect the economy to continuously grow over the next six months. Given your expectations and your calculation for the yield of the three-month T-bills and the three-month commercial paper (note: annualized yield for the three-month commercial paper if the investor chose to hold it till maturity is different from the one you calculate in part ii ), would you…
yog arorilbt The spot price of silver is $25 per ounce. The storage costs are 0.5% per year. Assuming that interest rates are 5% per annum calculate the futures price of silver for delivery in 9 months. (both storage costs and interest rate are continuously compounding).
Question 5
2. Consider a 6% T-note with 1.5 years to maturity. Spot rates (expressed as semiannual yields to maturity) are: 6 months = 5%, 1 year = 6% and 1.5 years = 7%. If the note is selling for $992, compute the arbitrage profit and explain how a dealer would perform the arbitrage. Par value= 1,000
need answer in step by step
4. On 1/1/21 we sell equipment and accept a 3-year note receivable for $36,500. The market value is $36,500. Payments of $13,655 include both principal and interest and are to be made annually starting on 1/1/22. The present value of the payments is $36,500. The bank would require the purchaser to pay interest of 6% in order to borrow from them. The equipment cost us $90,000 and had a book value of $40,000. Note: Be sure to show the date of each journal entry. The 'right' journal entry on the 'wrong' date is wrong. a. Prepare an amortization table b. Prepare the journal entry for 1/1/21 c. Prepare the journal entry for 12/31/21 d. Prepare the journal entry for 1/1/22 Amortization table: Journal entries: Debits Credits 1/1/21 12/31/21 1/1/22