Suppose that the spot price of copper is $3.25 per pound, the continuously compounded lease rate for copper is 4%, and the continuously compounded risk-free rate is 2%. Suppose that copper can be stored at zero cost. a)lf you short sell copper for one year, what is the

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Author:Erwin Kreyszig
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Finance
Suppose that the spot price of copper is $3.25 per
pound, the continuously compounded lease rate
for copper is 4%, and the continuously
compounded risk-free rate is 2%. Suppose that
copper can be stored at zero cost.
a)lf you short sell copper for one year, what is the
total cash flow(including both the cost of returning
the copper borrowed and any lease payment) to
the copper lender at the end of the year?
b)What is the 1-year forward price of copper?
c)lf there are no arbitrage opportunities, what is
the maximum possible 1-year forward price for
copper? If the forward price were above this level,
how could you take advantage of it?
Transcribed Image Text:Finance Suppose that the spot price of copper is $3.25 per pound, the continuously compounded lease rate for copper is 4%, and the continuously compounded risk-free rate is 2%. Suppose that copper can be stored at zero cost. a)lf you short sell copper for one year, what is the total cash flow(including both the cost of returning the copper borrowed and any lease payment) to the copper lender at the end of the year? b)What is the 1-year forward price of copper? c)lf there are no arbitrage opportunities, what is the maximum possible 1-year forward price for copper? If the forward price were above this level, how could you take advantage of it?
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