Question

The current spot price of Copper is $2.7445 per pound. The storage costs are $0.05 per pound per year payable monthly. Physical holding of copper now can yield $0.13 per pound per year which is achievable monthly. The price of a 9-month futures contract of copper is currently listed as 2.7685. Assume that interest rates are 10% per annum and monthly compounded.

a) If the cost-of carry relationship is held under no-arbitrage conditions, what should the 9-month futures price be (4 d.p.)? b) Is the listed 9-month futures price provide arbitrage opportunity (assume transaction costs are negligible)? Justify. c) If the listed futures price is correct, what would be the underlying annual yield.

b) Is the listed 9-month futures price provide arbitrage opportunity (assume transaction costs are negligible)? Justify.

c) If the listed futures price is correct, what would be the underlying annual yield.

Answer 1

The problem is given to calculate the price of future in no arbitrage condition. so i have termed that price as THEORETICAL price in my answer attached below.