A one-year forward contract on gold is entered into when the spot price of gold is $200 per ounce and the risk-free rate of interest is 5 percent per year, compounded annually. Each contract is on 100 ounces of gold.
(a) What is the theoretical forward price?
(b) What is the initial dollar value of the forward contract, that is, the value of the contract as a financial instrument at contract inception?
(c) Six months later, the price of gold falls to $180 per Troy ounce and the risk-free interest rate is still 5 percent. What is the gain or loss on a long position per contract? What is the new theoretical forward price on the same contract?