1. Suppose the price of gold is $850 per ounce. a. If the pound sterling price...

1. Suppose the price of gold is $850 per ounce.

a. If the pound sterling price of gold is £560 per ounce, what should you expect the pound price of a dollar to be?

b. If it actually only costs £0.50 to purchase a dollar, could you make a profit here? If so, how? And if not, why not? (2 pts)

c. How will the bond be affected Increase, Decrease, or stay the same

The bond is exempt from federal income taxes. ________________

Expert Solution

	US	UK
Gold Price per Ounce	$ 850	£ 560

a.	Implied Pound Price per dollar = £ 560/$850
	Pound Price per dollar = £ 0.66/$

b.	Actual Pound Price per Dollar = $ 0.50
	Then, Gold price per ounce should be £ 850/$ 0.5 = £425 per ounce
	But, it is trading at £ 560 per ounce in UK.
	It is observed that Gold in UK is overpriced, hence arbitrage profits can be made, subject to taxes and restrictions.

	Purchase an ounce Gold in US	$ (850)
	Bring it to UK and Sell, we will receive	£ 560
	Reconvert amount received in £ (£ 560/$ 0.5 = $ 1120	$ 1,120
	Profit Made per Ounce of Gold = $ 1,120 - $ 850 = $ 270	$ 270

(c) As there is a mispricing and arbitrage oppurtunities, everyone tries to invest in gold rather than bond, hence bond prices decreases.

jeff jeffy answered 1 year ago

The current price of gold is $1688 per ounce. The volatility of gold price is 20%...

The current price of gold is $1688 per ounce. The volatility of gold price is 20% per annum. The continuously-compounded risk-free rate is 5% per annum. What is the value of a 3-month call option on an ounce of gold with a strike price of $1750 according to the BSM model?

The current spot price of gold is $1,780 per ounce (oz.)

The current spot price of gold is $1,780 per ounce (oz.). Storing gold costs $12 per oz. per year, and the storage costs are paid when the gold is taken out of storage. The risk-free rate is 5% per annum (continuously compounded).i) What is the futures price for gold delivery in three-month?ii) If the current futures price for delivery of gold in three-month is $1810 per oz., identify a riskless arbitrage strategy

Suppose the current price of gold is $1,440 an ounce. Hotshot Consultants advises you that gold...

Suppose the current price of gold is $1,440 an ounce. Hotshot Consultants advises you that gold prices will increase at an average rate of 14% for the next two years. After that the growth rate will fall to a long-run trend of 3% per year. Assume that gold prices have a beta of 0 and that the risk-free rate is 6%. What is the present value of 1.2 million ounces of gold produced in 10 years? WRITE YOUR ANSWER IN...

QUESTION 31 On January 1, 2000 the price of gold was $282 per ounce. On January...

QUESTION 31 On January 1, 2000 the price of gold was $282 per ounce. On January 1, 2013 the price was $1,890. What is the compound rate of growth in the price of gold over this period? 21.10% 19.17% 17.18% none of the above QUESTION 32 What is the monthly discount factor (or present value factor) at 3% for 30 years? 11.26% 19.60% 20.30% 21.33% None of the above Please solve both questions showing a step by step solution with...

Suppose the storage cost for gold is $70 per ounce per year and the interest rate...

Suppose the storage cost for gold is $70 per ounce per year and the interest rate for borrowing or lending is 3% per annum, compounded continuously. Storage costs are assessed when you take delivery of the gold, but you can pay them at a later date with accumulated interest. 1. Show how you could make an arbitrage profit if the June and December futures contracts for a particular year trade at $1,350 (spot price) and $1,400 per ounce (spot price),...

The current price (in June) of gold is $1,900 per ounce. Daphne wants to write a...

The current price (in June) of gold is $1,900 per ounce. Daphne wants to write a long forward on an ounce of gold for 3 months from now (in September). The current continuously compounded risk-free interest rate is 4% per annum. In the following calculations, ignore any tax, transaction costs, and other fees. a) Calculate the arbitrage-free forward price. [2 marks] b) Suppose the current market forward price is $1,925. Describe all the steps you would take to make an...

A trader can sell gold at $794.00 per ounce and buy it at $800.00 per ounce....

A trader can sell gold at $794.00 per ounce and buy it at $800.00 per ounce. The trader can invest money at 5.7% per year and borrow money at 6% per year, each compounded annually. For what range of two-year forward prices of gold does the trader have no arbitrage opportunity? Assume no storage costs.

If the spot price of gold is $980 per troy ounce, the risk-free rate is 4%,...

If the spot price of gold is $980 per troy ounce, the risk-free rate is 4%, storage and insurance costs are zero, ( a) what should the forward price of gold be for delivery in 1 year? (b) Use an arbitrage argument to prove the answer. Include a numerical example showing how you could make risk-free arbitrage profits if the forward price exceeded its upper bound value.

With the market price of gold at C$1,562.50 per ounce (C$ stands for Canadian dollars), Maritime...

With the market price of gold at C$1,562.50 per ounce (C$ stands for Canadian dollars), Maritime Resources Corp., a Canadian mining firm, would like to assess the financial feasibility of reopening an old gold mine that had ceased operations in the past due to low gold prices. Reopening the mine would require an up-front capital expenditure of C$67.9 million and annual operating expenses of C$19.43 million. Maritime expects that over a 5-year operating life it can recover 174, 000 ounces...

Suppose the pound sterling is offered at S($/£) 1.9422 in New York. The euro is offered...

Suppose the pound sterling is offered at S($/£) 1.9422 in New York. The euro is offered at S($/€) 1.4925 in Frankfurt. London banks are offering pounds sterling at S(€/£) 1.2998. a) Does a profitable arbitrage opportunity exist? Is so, how can the opportunity be exploited (Specifically describe the steps that should be taken)? b) What arbitrage profit, if any, can be earned on an initial investment of $1,000,000?

Question