2. Forwards (30 points total) Note: these parts are all independent of each other. a. (5 points) Suppose the interest rates (all per annum with continuous compounding) are Euro Zero Rate Maturity Hong Kong Dollar Zero Rate 6 months 2.0% 2.5% 3.0% 3.2% 1 year What is the cost of carry for a one-year Hong Kong Dollar to Euro currency forward contract assuming prices are quoted as Hong Kong Dollars per Euro? b. (5 points) Zero rates are 0% at all maturities. Suppose pork costs $0.80 per pound, and you see a one-year forward contract available on pork with forward price $0.70 per pound. This does not match the usual formula (0.80 20.00x10.70) yet there is no arbitrage opportunity. Explain why in 2-3 sentences. c. (10 points) Suppose the spot price for gold is $2000 per ounce. The one-year zero rate is 2% per annum with continuous compounding, and the one-year expected return on gold is 3% per annum with continuous compounding. Suppose it costs nothing to store gold. You see a one-year gold forward contract available for $2060.91. Is this priced fairly? If so, show why. If not, briefly describe the arbitrage opportunity. In either case, justify your answers using the relevant equation(s) and a few (2-3) sentences. d. (10 points) You entered into a three-year forward contract on an investment asset with no storage costs and no income two years ago. At that time, the spot price for the underlying asset was $1000, and the forward price was $1100. Today, the spot price is $1200 and the forward price is $1250. What is the value of this contract to you today, assuming you are long? 2. Forwards (30 points total) Note: these parts are all independent of each other. a. (5 points) Suppose the interest rates (all per annum with continuous compounding) are Euro Zero Rate Maturity Hong Kong Dollar Zero Rate 6 months 2.0% 2.5% 3.0% 3.2% 1 year What is the cost of carry for a one-year Hong Kong Dollar to Euro currency forward contract assuming prices are quoted as Hong Kong Dollars per Euro? b. (5 points) Zero rates are 0% at all maturities. Suppose pork costs $0.80 per pound, and you see a one-year forward contract available on pork with forward price $0.70 per pound. This does not match the usual formula (0.80 20.00x10.70) yet there is no arbitrage opportunity. Explain why in 2-3 sentences. c. (10 points) Suppose the spot price for gold is $2000 per ounce. The one-year zero rate is 2% per annum with continuous compounding, and the one-year expected return on gold is 3% per annum with continuous compounding. Suppose it costs nothing to store gold. You see a one-year gold forward contract available for $2060.91. Is this priced fairly? If so, show why. If not, briefly describe the arbitrage opportunity. In either case, justify your answers using the relevant equation(s) and a few (2-3) sentences. d. (10 points) You entered into a three-year forward contract on an investment asset with no storage costs and no income two years ago. At that time, the spot price for the underlying asset was $1000, and the forward price was $1100. Today, the spot price is $1200 and the forward price is $1250. What is the value of this contract to you today, assuming you are long