Q2

Question 2 5 pts a) The forward price of a consumption asset only has an upper bound. Explain why. (1 mark) b) A commodity provides no income and has no storage costs. Trader A can buy the commodity for $1100 per ounce and short sell it for $1050 per ounce. Trader A can also borrow funds at 2% per year and invest funds at 1.5% per year (both with continuous compounding). For what range of three-year forward prices does trader A have no arbitrage opportunities? (4 marks)