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8. Suppose that a bank has entered into a forward contract to buy 1 million ounces of gold from a mining company in two years for $1500 per ounce. The current forward price for the contract for the contract is $1600 per ounce. The probability of the company defaulting during the first year is 2% and the probability of the company defaulting during the second year is 3%. Defaults are assumed to happen at the midpoints of the years. The risk-free rate is 5% per annum. The financial institution anticipates a 30% recovery in the event of a default. The volatility of the forward price of gold when the forward contract expires in two years is 20%. Calculate the credit value adjustment (CVA) for the forward contract. (4 marks) b. Calculate the (i) no-default of the forward contract and (ii) the value after the possibility of defaults has been taken into account. (2 marks) a. 8. Suppose that a bank has entered into a forward contract to buy 1 million ounces of gold from a mining company in two years for $1500 per ounce. The current forward price for the contract for the contract is $1600 per ounce. The probability of the company defaulting during the first year is 2% and the probability of the company defaulting during the second year is 3%. Defaults are assumed to happen at the midpoints of the years. The risk-free rate is 5% per annum. The financial institution anticipates a 30% recovery in the event of a default. The volatility of the forward price of gold when the forward contract expires in two years is 20%. Calculate the credit value adjustment (CVA) for the forward contract. (4 marks) b. Calculate the (i) no-default of the forward contract and (ii) the value after the possibility of defaults has been taken into account. (2 marks) a