Question
The current price (in June) of gold is $1,900 per ounce. Daphne wants to write a long forward on an ounce of gold for 3
The current price (in June) of gold is $1,900 per ounce. Daphne wants to write a long forward on an ounce of gold for 3 months from now (in September). The current continuously compounded risk-free interest rate is 4% per annum.
In the following calculations, ignore any tax, transaction costs, and other fees.
a) Calculate the arbitrage-free forward price. [2 marks]
b) Suppose the current market forward price is $1,925. Describe all the steps you would take to make an arbitrage profit. [3 marks]
c) Daphne entered into the long forward at the price calculated in part a). One month passes (it is now July), and the current price of gold is $1,950. The continuously compounded risk-free interest rate is now 5% per annum.
Eddie, another investor, is interested in taking over Daphnes position in her forward contract. Perform the relevant calculations for the amount of money that would have to change hands. Also, clearly state which person would have to pay the other. [4 marks]
d) Roz was the counterparty to Daphnes original forward contract. State the value of Rozs position in July.
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