Essay Solutions for Mcdonald Chapter 6
Commodity Forwards and Futures
Question 6.1. The spot price of a widget is $70.00. With a continuously compounded annual riskfree rate of 5%, we can calculate the annualized lease rates according to the formula: F0,T = S0 × e(r−δl )×T ⇔ F0,T S0 = e(r−δl )×T S0 = (r − δl ) × T F0,T 1 ln T S0
⇔ ln
F0,T
⇔ δl = r −
Time to expiration Forward price Annualized lease rate 3 months $70.70 0.0101987 6 months $71.41 0.0101147 9 months $72.13 0.0100336 12 months $72.86 0.0099555 The lease rate is less than the riskfree interest rate. The forward curve is upward sloping, thus the prices of exercise 6.1. are an example of contango. Question 6.2. The spot price of oil is $32.00 per barrel. With a continuously compounded annual …show more content…
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Part 2 Forwards, Futures, and Swaps
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Pencils can be loaned. We engage in a cash and carry arbitrage: Transaction Time 0 Short forward 0 Buy tailed pencil −$0.19025 position, lend @0.05 borrow @ 0.1 $0.19025 Total 0 Time T = 1 F0,T − ST ST −$0.2103 F0,T − $0.2103
For there

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