I NEED HELP IN UNDERSTANDING HOW THE PROCESS WORKS. PLEASE EXPLAIN EACH ANSWER TO THE POINT WHERE A HIGH SCHOOL STUDENT CAN UNDERSTAND. OR ANY TRICKS TO LEARN THE MATERIAL FOR AN UPCOMING TEST.

THE SOLUTIONS ARE ALREADY PROVIDED, JUST NEED AN EXPLANATION.

ITS INVESTMENTS FINANCE DEALING WITH FORWARD PRICING.

Sample problem 10: forward pricing silver & stock-solution. 1. You work for the Silver King mining company. The current spot market price for silver is $10.00 per ounce. The Amalgated Chip company has offered a forward purchase of 100,000 ounces from Silver King, offering to pay $10.50 per ounce in six months in order to take delivery. The simple interest rate is 3.0% for six months. Should Silver King accept the contract, or should it sell the silver in the spot market? It costs the company $.05 per ounce, per month, to store the silver. Show your work for full credit. Solution: Sale today, invest proceeds at 3% simple, gives $10.00 (1.03) = $10.30 per oz in six months. Sale Forward at $10.50 requires $0.05 per oz., per month storage for six months, giving $10.50 - 60.05) = $10.20 per oz in six months. Sell the silver in the spot market today. 2. Assume that there is a forward contract written on the widely held stock PANIC, Inc. The current price of PANIC is $100 per share. The forward contract expires six months form now. Exactly three months from now, PANIC will pay a special dividend of $5 per share. The simple interest rate is 2.00% for three months (or 4.04% for six months). a) What is the correct price for the six-month PANIC forward contract? Solution: F(0,1) = S(O)(1+r)" - FV(dividends through time T) = $100 (1.0404) - $5 (1.02) = $98.94 b) You observe the PANIC forward trading at $101. Is there an arbitrage opportunity? If so, explain carefully exactly how you would put in place a strategy to earn profits risklessly. Solution: Action/Position Cash Today T=3 months T=6months Sell Forward Buy Stock Receive dividend Borrow $100 -100 +101 - S(T) +S(T) +5.10 -104.04 +$2.06 +100 0