The spot price of Timber is US$300. The 1-year forward price of gold is US$340. The 1-year US$ interest rate is 5% per annum. Is there an arbitrage opportunity?
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The spot price of Timber is US$300. The 1-year forward price of gold is US$340. The 1-year US$ interest rate is 5% per annum. Is there an arbitrage opportunity?
F = S (1+r)T
Spot price (S)
Forward price (F)
Contract deliverable in years (T)
Risk-free rate of interest (r)
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- Suppose that the spot price of gold is US$1,700 per ounce. The quoted 1- year forward price of gold in the market is US$1,800, whereas it should have been $1,785. The 1-year US$ interest rate is 5% per annum. On the basis of the given information, answer the following: a) Is there an arbitrage opportunity? Why? b) If there is an arbitrage opportunity, show how will you exploit it? What will be the arbitrage profit? Hint: Recall that arbitrage means exploiting mispricing in the market to your advantage and any profit thus gained is risk-free. Use this understanding…On the London Metals Exchange, the price for copper to be delivered in one year is $5,820 a ton. (Note: Payment is made when the copper is delivered.) The risk-free interest rate is 2.00% and the expected market return is 8%. a. Suppose that you expect to produce and sell 10,000 tons of copper next year. What is the PV of this output? Assume that the sale occurs at the end of the year. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) b-1. If copper has a beta of 1.28, what is the expected price of copper at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b-2. Assume copper has a beta of 1.28. What is the certainty-equivalent end-of-year price?Assume that spot gold price is trading at US$1,200 per ounce and Golden Star Resources wants to lock-in this “good” price for 3,000 ounces to be delivered in exactly a year 19th May 2021. The following assumptions applies:Spot price = US$1,200 per ounce. US 12-month cash interest rate = 5% 12-month gold lease rate (or gold borrowing fee) = 2% Banker’s profit margin = 0.5% Calculate the total price Golden Star Resources will receive on 19th May 2020 under normal circumstances.Rates for This Example Spot price = US$1,200 per ounce. US 12-month cash interest rate = 5% 12-month gold lease rate (or gold borrowing fee) = 2.5% Banker’s profit margin = 0.5% Identify the hedging instrument Golden Star Resources used to accomplish its objective. What other hedging tool can Golden Star Resources use to accomplish the same objective, and what financial position will the company take? (Mitigate price risk) Offer TWO reasons why you selected that hedging tool identified in the above…
- Currently, the spot rate is RM4.2000/USD and the one year forward rate is RM4.1000/USD. Interest rate in United States is 3% per annum and in Malaysia is 2% per annum. Assume that you can borrow as much as USD100,000 or RM420,000 for your coming project. If Interest Rate Parity (IRP) is not holding, determine how would you carry out covered interest arbitrage (CIA) and compute the profit.Work out the value of European Call on a risky asset A, currently selling at $600. The European Call has a term to maturity of 1.5 years and a strike price of $675. SD(dA/A), the volatility of returns on the risky asset is 18% per year, and the discrete risk-free rate is 0.9% per yearAssume the annual interest rate on a British pound denominated asset maturing in 30 days is 7.5 percent. The annual interest rate on a dollar-denominated asset maturing in 30 days is 8 percent. (30 days is approximately one-twelfth of a year!) Mtoto Company, a U.S. firm, wants to spend $18,000,000 to buy the pound-denominated asset or the dollar-denominated asset. The spot exchange rate is $1.258 per pound and the 30-day forward exchange rate is $1.3432 per pound. (a) How much (in dollars) will Mtoto Company make if it invests in the dollar-denominated asset? (b) How much (in dollars) will Mtoto Company make if it invests in the pound-denominated asset? (c) What do you think will happen to the value of the pound if interest rates remain the same?
- The firm invests $1,000 today, and expects realizes after tax cashflows in the amounts of 600 Euros and 700 Euros, at the ends of years 1-2, respectively. The firm locks in future exchange rates in forward markets, at $1.18/Euro at end of year 1, and $1.25/Euro at the end of year 2. Hurdle=10%. What is the project’s NPV?An investment manager based in Germany hedges a portfolio of UK gilts with a 3-month forward contract. The current spot rate is GBP0.833/EUR and the 90-day forward rate is GBP0.856/EUR. At the end of 3 months, the gilts have risen in value by -2.50% (in GBP terms), and the spot rate is now GBP0.82/EUR. What was the true cost of the forward contract? a. 11.044% annualised. b. 17287% annualised. c. 7287% annualised. d. 14.787% annualised.A proposed project which requires an investment of R10,000 (now) is expected to generate a series of five payments in constant rands. It begins with R6,000 at the end of first year but increasing at the rate of 5% per year thereafter. Assume that the average inflation rate is 4% and the market interest rate is 11% during this inflationary period. What is the equivalent present worth of this investment?
- A U.S. investor can borrow 1,000,000 or 500,000 GBP. The spot rate is $2.00/GBP, the one year forward rate is $2.02/GBP. The U.S. one year interest rate is 14% and the one year British interest rate is 12%. Determine if there is a covered interest rate arbitrage opportunity, and if so, clearly show each step involved in the arbitrage opportunity. Show the total dollar profit. If you determined that there is no arbitrage opportunity, describe why you made that decision.Paydirt Pete Mining expects receipts from a mining site to decdine according to an arithmetic gradient of $46526 per year. If this year's receipts are expected to be $290893 and the company expects the useful life of the well to be 7 years, what is the equivalent uniform annual worth during this time period from the mine at an interest rate of 13% per year? Write your answer to two decimal places. This Blackboard question was created by Kendra Ahmed, MBA, MCIS.The current spot price of gold is $1200 per ounce. The riskless interest rate is 10% per annum. For simplicity, assume there are no storage/security costs of gold. a) What is the arbitrage-free forward price for the delivery of gold in 8 month's time?
