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Jim Lytle a financial advisor, recommends that his clients invest in gold. Specifically, he is advising a client to invest $100,000 to purchase 175 ounces of gold bullion, with the expectation of holding the gold for a period of one year before selling it. The client points out that the futures price for the 175 ounces gold to be delivered in one year is $104,000, which represents a 4% return on the $100,000 investment, while the one-year Treasury yield is currently 5% "Would not it be better," the client asks, "If I sold 175 ounces of gold today for $100,000, while purchasing a forward contract to purchase the gold in one year at a price of $104,000? I could not then invest the $100,000 in %5 treasury bonds maturing in one year,"

Analyze the returns for the investor's proposed strategy. What is your recommendation?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M942578

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