Suppose that the curent price of titanium is $500 per oz with costless storage. The term structure is flat witha continuously compounded rate of interest of 4% for all maturities.a) Find the forward price of titanium with delivery in three months.b) Assume it costs S0.5 per oz per month to store titanium. The storage cost is payable monthly in advance.What is the new forward price? What can explain the price difference in (a) and (b)?c) Assume storage costs are as in (b) and payable monthly in advance. If the forward price is given to beS550 per oz, explain whether there is an arbitrage opportunity and how to exploit it. Use a table showingtransactions and total net cash flows at the end of each month.

Forward priceThe forward price is referred to as the predetermined price of a commodity at a…

Answered: Suppose that the current price of…

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter13: Other Financing Alternatives

Section: Chapter Questions

Problem 1bM

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Suppose that the current price of titanium is $500 per oz with costless storage. The term structure is flat witha continuously compounded rate of interest of 4% for all maturities.a) Find the forward price of titanium with delivery in three months.b) Assume it costs $0.5 per oz per month to store titanium. The storage cost is payable monthly in advance.What is the new forward price? What can explain the price difference in (a) and (b)?c) Assume storage costs are as in (b) and payable monthly in advance. If the forward price is given to be$550 per oz, explain whether there is an arbitrage opportunity and how to exploit it. Use a table showingtransactions and total net cash flows at the end of each month.
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