Suppose that the current price of titanium is $500 per oz with costless storage. The term structure is flat with a continuously compounded rate of interest of 4% for all maturities. a) Find the forward price of titanium with delivery in three months. b) Assume it costs $0.5 per oz per month to store titanium. The storage cost is payable monthly in advance. What is the new forward price? What can explain the price difference in (a) and (b)? c) Assume storage costs are as in (b) and payable monthly in advance. If the forward price is given to be $550 per oz, explain whether there is an arbitrage opportunity and how to exploit it. Use a table showing transactions and total net cash flows at the end of each month.
Suppose that the current price of titanium is $500 per oz with costless storage. The term structure is flat with a continuously compounded rate of interest of 4% for all maturities. a) Find the forward price of titanium with delivery in three months. b) Assume it costs $0.5 per oz per month to store titanium. The storage cost is payable monthly in advance. What is the new forward price? What can explain the price difference in (a) and (b)? c) Assume storage costs are as in (b) and payable monthly in advance. If the forward price is given to be $550 per oz, explain whether there is an arbitrage opportunity and how to exploit it. Use a table showing transactions and total net cash flows at the end of each month.
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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Suppose that the current price of titanium is $500 per oz with costless storage. The term structure is flat with
a continuously compounded rate of interest of 4% for all maturities.
a) Find the forward price of titanium with delivery in three months.
b) Assume it costs $0.5 per oz per month to store titanium. The storage cost is payable monthly in advance.
What is the new forward price? What can explain the price difference in (a) and (b)?
c) Assume storage costs are as in (b) and payable monthly in advance. If the forward price is given to be
$550 per oz, explain whether there is an arbitrage opportunity and how to exploit it. Use a table showing
transactions and total net cash flows at the end of each month.
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