Wkshp6.soln.2008 - THE UNIVERSITY OF AUCKLAND Department of...

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THE UNIVERSITY OF AUCKLAND Department of Accounting and Finance FINANCE 261 Introduction to Investments SOLUTION: WORKSHOP 6 1. Scenario 1 (gold spot price increases to $950 per ounce on 15 June) Go forward to 15 June and suppose that the gold spot price at that time is $950. Since the futures price expiring on 15 June converges to the spot price, the gold futures contract is also trading at $950 per ounce. To close out your futures position, you long (buy) the futures at $950 per ounce. Overall, you lose $920 - $950 = -$30 from your futures position (since you bought at a higher futures price but sold at a lower futures price). At the same time, you sell an ounce of gold at the spot price of $950. Your total cash inflow is $950 - $30 = $920. Scenario 2 (gold spot price decreases to $880 per ounce on 15 June) Go forward to 15 June and the gold spot price at that time is $880. Since the futures price expiring on 15 June converges to the spot price, the gold futures are also trading at $880 per ounce. To close out your futures position, you buy the futures contract at $880 per ounce. Overall, you gain $920 - $880= $40 from your futures position (since you bought at a lower futures price but sold at a higher futures price). At the same time, you sell an ounce of gold at the spot price of $880. Your total cash
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Wkshp6.soln.2008 - THE UNIVERSITY OF AUCKLAND Department of...

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