# summer - Family name comma personal names Your student ID...

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ACT245 Sum09 TT2 v03 Privacy Version Code A for web Page 2 of 11 1. The force of interest is 2% per annum and does not change. At time 0 you enter into a long forward contract to buy platinum at time 2 years. The contracted delivery forward price F 0, 2 is \$1200 per ounce. Platinum has zero storage cost and has zero convenience yield. At time 1 the spot price of platinum is S 1 =\$1300 per ounce. Calculate the value of your original forward contract (‘the value of the piece of paper’) at time 1. (A) Less than \$120.000 (B) \$120.000 but less than \$121.000 (C) \$121.000 but less than \$122.000 (D) \$122.000 but less than \$123.000 (E) \$123.000 or more (E)Solution: F 1,2 = 1300*exp(0.02*1) = 1326.2617 PV 1 (contract at 1200) = (1300*exp(0.02*1) -1200* exp(-0.02*1) ) = 1300 - 1200* exp(-0.02*1) = 1300 -1176.238=123.762 This makes sense: at time 1 could pay 1300 to buy the platinum immediately. Or could pay 1176.238 to buy a 1 year zero-coupon bond and then use the proceeds and the piece of paper at time 2 to get the platinum.
ACT245 Sum09 TT2 v03 Privacy Version Code A for web Page 3 of 11 2. Lisa Chow sells short \$1,000 market value of Knox College Lawn Mowing Inc. The margin

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summer - Family name comma personal names Your student ID...

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