Forward contact

devinarastogi84
Good Student
Posts: 22
Joined: Thu Apr 17, 2014 9:40 pm

Forward contact

Postby devinarastogi84 » Sat May 17, 2014 11:59 am

The current spot price for iron is $0.485/pound. The annual risk-free rate is 4.5% and the cost to store and insure iron is $0.008/pound/month. A 3 month forward contract for iron is trading at $0.524/pound. What will be the amount of profit that an investor is getting by selling contracts?
Select one:
a. $0.004/pound
b. $0.008/pound
c. $0.006/pound
d. $0.001/pound
Feedback
The correct answer is $0.004/pound.

The Forward price = 0.485e0.045×0.25 + (0.008 + 0.008 × 1.00375 + 0.008 × 1.003752) = $0.520/pound
So investor will get the profit by selling a forward contract = 0.524 – 0.520 = $0.004/pound
The correct answer is: $0.004/pound.

My question is how do we calculate r for storage cost , in above question r used is .00375. how we got this value?

pristine
Posts: 5
Joined: Wed Apr 03, 2013 9:45 pm

Forward contact

Postby pristine » Thu May 29, 2014 10:24 am

Hi Devina,

Please kindly provide us with the source/reference of this query.
Thanks


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