Again, suppose silver is currently selling at $4.23 per ounce in the spot market. Assume as...

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Again, suppose silver is currently selling at $4.23 per ounce inthe spot market. Assume as well that the current risk-free rate(implied repo rate) is 3.75% and that silver contracts involve 5000ounces each. Also, now assume that carrying costs (storage andinsurance) for silver are accessed at .31% (0.0031) per ounceprice.
a. Including carrying costs, what should the 6 month (180 days)silver futures contract be selling for according to thecost-of-carry model?
b. If the 6 month (180 day) futures contract for silver isselling for $4.18 per ounce, what should you, as an investor,do?
c. What arbitrage profit will you realize if you decide to workwith two (2) silver contracts?
These are the correct answers, how do I get tothem?
a. $21,600 (at a price of $4.32/oz.)
b. reverse cash-and-carry arbitrage needed
c. $1293.13

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3.6 Ratings (543 Votes)

a according to cost of carry model future price is spot rate ert where r is risk free rate of interest and t is time period in years given to us spot rate 423 r 375 or 00375 t 6 See Answer

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