Question

The price of silver is $20 per ounce, the riskless rate of interest is 10% c.c. and storage costs are $1.00 per annum, payable quarterly in advance. The no-arbitrage price for a futures contract on silver with a term of 6 months is

Answer 1

Answer:

$ 21.05

Explanation:

Thinking process:

The original price = $ 20.00

Interest  = 10 %

storage costs = $ 1.00

the new price = 0.1 × $ 20.00

                       = $ 2

However, this is paid over 6 months, so it will be = $ 2 (0.5)

                                                                                 = $ 1.00

The storage cost for 6 months = 0.5 (1.00)

                                                   = $ 0.5

The total cost at 6 months        = $ 0.5 + $ 1.00 + $ 20.00

                                                    = $ 21.05