Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 5 A trader expects the storage cost of a commodity to increase and establishes a calendar spread that is long a three-year forward contract

image text in transcribed
Question 5 A trader expects the storage cost of a commodity to increase and establishes a calendar spread that is long a three-year forward contract and short a two- year forward contract on the commodity with a spot price of $70. The trader has $100,000 notional value long and short positions in the forward contracts. The storage rate is 3%, the convenience yield is 1%, and the risk-free rate is 2.2%. Please round your answers to two decimal places. a) What short position in the two-year forward contract would hedge the $100,000 notional value position in the three-year contract? [4 marks] b) What long position in the three-year forward contract would hedge the $100,000 notional value position in the two-year contract? [4 marks) c) What is the trader's profit or loss if the spot price changes or the storage cost decreases by 1%? [8 marks] d) Use the above example to explain returns and risks of calendar spreads. [4 marks] Total [20 marks] Question 5 A trader expects the storage cost of a commodity to increase and establishes a calendar spread that is long a three-year forward contract and short a two- year forward contract on the commodity with a spot price of $70. The trader has $100,000 notional value long and short positions in the forward contracts. The storage rate is 3%, the convenience yield is 1%, and the risk-free rate is 2.2%. Please round your answers to two decimal places. a) What short position in the two-year forward contract would hedge the $100,000 notional value position in the three-year contract? [4 marks] b) What long position in the three-year forward contract would hedge the $100,000 notional value position in the two-year contract? [4 marks) c) What is the trader's profit or loss if the spot price changes or the storage cost decreases by 1%? [8 marks] d) Use the above example to explain returns and risks of calendar spreads. [4 marks] Total [20 marks]

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Data Analytics Theory And Application

Authors: Sinem Derindere Köseo?lu

1st Edition

303083798X,3030837998

More Books

Students also viewed these Finance questions