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Interest rates for different maturities (1yr, 2, 3, 4, 5) are (1.0%, 2.8, 4.5, 4.7, 4.0) respectively. 4. Three years from now you will sell

Interest rates for different maturities (1yr, 2, 3, 4, 5) are (1.0%, 2.8, 4.5, 4.7, 4.0) respectively.


4. Three years from now you will sell 10 ounces of gold and immediately deposit the proceeds for two years.  The spot price of gold is $500 per ounce and it costs 10% to store gold.  You decide to hedge all risk.  How much will you have at t=5?

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SOLUTION To hedge the risk of selling 10 ounces of gold in three years we can enter into a forward contract to sell 10 ounces of gold at a predetermin... blur-text-image

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