Business, 24.02.2020 23:28, romyknight

A trader wants to invest in gold. At the current moment the trader can buy gold for $1270 per ounce and sell gold for $1250 per ounce. Zero coupon bonds with maturity 1 year (and face value $1) can be bought for $0.95 per bond and sold (issued) for $0.9 per bond - that is, for every $0.95 deposited now, the trader can get $1 after 1 year, while for every $0.9 borrowed now, the trader has to pay back $1 after 1 year. The target of this exercise is to find the range of forward prices on gold with delivery in one year such that the trader has no arbitrage opportunities. a) (3 pts) Construct a trading strategy by buying gold and selling forward contracts and with zero initial investment. Calculate the corresponding final value at the end of 1 year using this trading strategy b) (3 pts) Construct a trading strategy by selling gold and buying forward contracts and with zero initial investment. Calculate the corresponding final value at the end of 1 year using this trading strategy c) (2 pts) To get rid of the arbitrage opportunities, what is the range of forward prices

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A trader wants to invest in gold. At the current moment the trader can buy gold for $1270 per ounce...