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A ounce of gold currently sells for $1,000. The annual continuously compounded risk-free rate is 6%. (a) Find the arbitrage-free value for the strike K for a one-year forward of gold per ounce. (Hint: This arbitrage-free strike is also called ’forward delivery price’ or ’value of the forward contract at time 0’) (b) Suppose you take a long position in this one-year forward of gold with the arbitragefree strike from (a). Half a year later, the gold price is $930. Find the value of your long position at this time (half a year after you entered the contract), assuming the annual continuously compounded risk-free rate is still 6%. What is the value of the short position at this time?

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Financial Management, Finance

Category:- Financial Management
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