Question one

Suppose the domestic currency is the Kenya shilling and the foreign currency is the US Dollar. Let the spot exchange rate be sh140 per $, the Kenyan interest rate be 14% and the US interest rate be 4%. These rates are continuously compounded and assumed to be fixed over the life of the contract. Calculate the forward price of a nine month contract Show the arbitrage profit if the forward price is both high and low than the calculated.

Question two

Consider a one year futures contract on gold. Suppose that it costs sh 3.5 per ounce per year to store gold, with the payment being made at the end of the year. Assume the spot price is sh 5,000 and the risk free rate is 9% per annum for all maturities, determine the future price of the gold. Show the arbitrage profit if the forward price is both high and low than the calculated.