solve14 - FNCE 3010 (Durham) HW 14 options 1. Go to...

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Unformatted text preview: FNCE 3010 (Durham) HW 14 options 1. Go to www.cbot.com and look up the price of a 5000 oz Silver futures contract for December 2008 (use the settlement price). Note that the price is quoted per ounce of delivered silver. Look at the contract specifications. What are the deliverable grades for this contract? What is the delivery date? Now, go to www.thebulliondesk.com and look up the spot price of an ounce of silver (take the average of bid and ask). Also, look up the three-month T-bill rate (e.g., at finance.Yahoo.com). Based on this spot price and proxy for the risk-free rate, what is the theoretical price of the silver futures? How close is it to the traded price? Do you think there might be an arbitrage opportunity here (Why or why not)? Suppose you are long silver futures. If the price of silver goes up by $2 per ounce between the time you bought the contract and when it matures, will you make or lose money? Suppose you own silver but are feeling nervous about the market and want to hedge your position using futures. Would you go long or short futures? Solution: The Dec08 futures price was $14.267 as of Oct 20, 2007. The deliverable specs are for 5000 troy ounces ( 6%) of refined silver, assaying no less than .999 fineness in cast bars weighting 1000 or 1100 troy ounces each. Delivery date is the last business day of Dec08. The spot price (as of Oct 20, 2007) was $13.52, and the three-month T-bill rate was 3.89%. Since there is about 1.19 years to delivery (as of Oct 20, 2007), the theoretical futures price should be 13 . 52 * 1 . 039 1 . 19 = $14 . 15. This is lower than the observed futures price (i.e., futures appear to be overpriced), so there is a potential arbitrage by borrowing at the risk-free rate, buying silver on the spot market,...
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This note was uploaded on 03/31/2008 for the course FNCE 3010 taught by Professor Donchez,ro during the Fall '07 term at Colorado.

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solve14 - FNCE 3010 (Durham) HW 14 options 1. Go to...

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