Consider an 8-month forward contract on Cisco Systems stock. Assume the current price of one share is $95 and the annual, continuously compounded risk-free interest rate is 5%. Answer the following questions. A. What must the forward price be equal to if there are no arbitrage opportunities? B. Note that if the risk-free rate of interest were zero, i.e., r=0, the forward price would equal the spot price, F=S. However, since r>0, the forward price is larger than the spot price. Explain why the forward price is larger than the spot price when r>0. C. Suppose the actual forward price is $95 per share. Use an arbitrage table to illustrate the arbitrage opportunity. D. Consider another forward contract on Cisco Systems stock. This contract is a long forward contract with a remaining maturity of 5 months. The current price of Cisco is $95, the risk-free rate of interest is 5% per year (with continuous compounding), and the delivery price is $90. What is the current value of this long forward contract? Suppose the spot price of corn is $2.25 per bushel. Storage costs are $0.50 per bushel per year payable semiannually in advance. The interest rate is 5% per year with continuous compounding. Note that corn is a commodity that is a consumption asset. Answer the following questions. A. Suppose the actual quoted price for a one-year forward contract is $2.75 per bushel. Explain whether or not there is an arbitrage opportunity. If one does exist, demonstrate how you can profit. B. Suppose the actual quoted price for a one-year forward contract is $2.95 per bushel. Explain whether or not there is an arbitrage opportunity. If one does exist, demonstrate how you can profit. The current spot price of a barrel of oil is $60. The risk-free rate of interest is 5% per year continuously compounded and the storage cost of oil is 3% per year continuously compounded. Answer the following questions. A. Suppose the current forward price of a barrel of oil is $60 for a three month forward contract. What is the implied convenience yield of oil? B. What is the meaning of the term "convenience yield" and why is the forward price decreasing in the convenience yield? Consider an 8-month forward contract on Cisco Systems stock. Assume the current price of one share is $95 and the annual, continuously compounded risk-free interest rate is 5%. Answer the following questions. A. What must the forward price be equal to if there are no arbitrage opportunities? B. Note that if the risk-free rate of interest were zero, i.e., r=0, the forward price would equal the spot price, F=S. However, since r>0, the forward price is larger than the spot price. Explain why the forward price is larger than the spot price when r>0. C. Suppose the actual forward price is $95 per share. Use an arbitrage table to illustrate the arbitrage opportunity. D. Consider another forward contract on Cisco Systems stock. This contract is a long forward contract with a remaining maturity of 5 months. The current price of Cisco is $95, the risk-free rate of interest is 5% per year (with continuous compounding), and the delivery price is $90. What is the current value of this long forward contract? Suppose the spot price of corn is $2.25 per bushel. Storage costs are $0.50 per bushel per year payable semiannually in advance. The interest rate is 5% per year with continuous compounding. Note that corn is a commodity that is a consumption asset. Answer the following questions. A. Suppose the actual quoted price for a one-year forward contract is $2.75 per bushel. Explain whether or not there is an arbitrage opportunity. If one does exist, demonstrate how you can profit. B. Suppose the actual quoted price for a one-year forward contract is $2.95 per bushel. Explain whether or not there is an arbitrage opportunity. If one does exist, demonstrate how you can profit. The current spot price of a barrel of oil is $60. The risk-free rate of interest is 5% per year continuously compounded and the storage cost of oil is 3% per year continuously compounded. Answer the following questions. A. Suppose the current forward price of a barrel of oil is $60 for a three month forward contract. What is the implied convenience yield of oil? B. What is the meaning of the term "convenience yield" and why is the forward price decreasing in the convenience yield
