Question 3a (10 marks) Explain and appraise currency futures and options (derivative tools) used to manage financial risk

Question 3b (15 marks) In February 2009, spot gold was trading at $950 per ounce. The annual lease rate was 0.125%. i. If the 1-month interest rate was 3.6% (LIBOR, annualized) and gold storage costs were 1.325% per year (annualized), what was the 1-month (net) cost of carry? Assume no convenience yield, and treat all rates as being given under the APR convention. ii. If a gold brokerage was contemporaneously selling gold at $960 for 1-month forward delivery, was there an arb opportunity? Explain briefly. Assume commissions of $15 per ounce to buy or sell gold, for both forward and spot purchases/sales.