a. Spot price silver is $20/oz. The Storage costs of silver are $0.60/oz and payable in advance. Risk free interest rate is 6% per year (continuously compared) for all maturities. Calculate the future price of silver in 3 years.

b. Explain if an arbitrage opportunity exists. If so explain how you would make an arbitrage profit. If not show also. Assume that holding costs are negligible and interest rates are continuously compared. The risk free interest rate is 10% per year.

i. Spot price of gold is $1600/oz. The 6 months-ahead gold futures are traded for $1700/oz

ii. The Spot price corn is $5/bushel. The 6 months ahead corn futures are traded for $5.10/bushel

c. Alloy Inc. supplies steel. A large order for delivery is in 6 months. You buy the required input steel. The firm buys both call and put options with the same strike price. Is the firm hedging or speculating?