PLEASE SHOW YOUR WORK. Silver currently trades for $99 per ounce. The cost to store sliver...

PLEASE SHOW YOUR WORK.

Silver currently trades for $99 per ounce. The cost to store sliver is 0.7% per year continuously compounded. The riskless rate of interest is 5.9% per year c.c. What is the fair value of a futures contract on silver maturing in 6 months?

Solutions

Expert Solution

Future value of contract = (S0 + U) * e^rt

S0 = 99 per ounce

U = Storage cost = 99* 0.7 = 6.93

e = a mathematical constant having value of 2.7183

r = 0.5

r = 5.9% per year or 2.95% per semi annual

Let’s put all the values in the formula

Future value of contract = (99 + 6.93)* 0.027183^0.0295*1

= 105.93 * .899107

= 95.24

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jeff jeffy answered 1 year ago

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