Financial Derivatives and Risk Management Assignment -
ANSWER EACH question -
Q1. The spot price of gold is $1,300 and the continuously compounded risk-free interest rate is 5%. Assume that gold will not have any storage cost.
(1) What is the futures price of gold with 12-month maturity?
(2) If the futures price is quoted at $1,385, how can you make money through arbitrage? Please show all transactions.
Q2. Consider a 1-year forward contract on the IBM stock. Currently the stock is trading at $150 per share on the NYSE. The stock is expected to pay a cash dividend of $5 per share in six months. The continuously compounded interest rates are 5% for six months and 6% for 12 months.
(1) Calculate the fair price of the 1-year forward contract on the stock.
(2) If the actual forward is quoted at $152, can you identify an arbitrage opportunity? If yes, please complete all necessary transactions to realize the profit.