A trader owns gold as part of a long-term investment portfolio

A trader owns gold as part of a long-term investment portfolio

Subject: Business    / Finance   
Question

1. A trader owns gold as part of a long-term investment portfolio. The trader can buy gold for $ 1,266 per ounce and sell gold for $ 1,214 per ounce. The trader can borrow funds at 5.03 % p.a. and invest funds at 4.7 % pa. (Both interest rates are expressed with continuously compounding.) For what minimum price of 3 year forward on gold does the trader have no arbitrage opportunities?

Assume there is no bid–offer spread for forward prices. Round your final answer to 2 decimal places only.

2.

1. A bank offers a corporate client a choice between borrowing cash at 11 % per annum and borrowing gold at 1 % per annum (If gold is borrowed, interest must be repaid in gold). Suppose that the risk-free interest rate is 9 % per annum, and storage costs are 0.48 % per annum, the spot price of gold is $ 1,200 per ounce and the corporate client wants to borrow $ 991,162 for 4 years.

Calculate the difference between cost of borrowing in cash and cost of borrowing in gold (in dollar amount). Note in calculating the difference, deduct the cost of borrowing in gold from the cost of borrowing in cash. All rates are quoted in continuously compounding. Round your final answer to 2 decimal places only.

3.

The Swiss exporter expects to received payment in US dollar in a month time. The bid and offer prices for the 1-month forward and futures contract on the Swiss franc are given in the following table:

    

bid
    

offer

forward
    

1.0125
    

1.0135

futures
    

0.9975
    

0.9985

which is more favourable for the Swiss exporter?
    

a.
    

forward
    

b.
    

futures