a. [3 marks] By using two carefully labelled cash flow diagrams in your
answer, setting out the cash flows associated with the forward contract
and the replicating portfolio, explain how you can determine the
arbitrage-free forward price of gold for the forward contract between
Johno and Gordo.
In your solution, take the current date as 23 October 2014 and the
current price of gold per kilo as AUD$45 561.78. Also, take the current
simple interest rate for all loans up to 180 days duration as 2.9% p.a.
Johno and his wife have just had a huge row, and have decided to get
divorced. Silvio is not speaking to Johno any more, so Johno will have to
re-price his forward contract.
b. [6 marks] Using the details given above, but now factoring in a cost
of secure storage of $50 for terms up to 180 days, and an insurance
cost of $20, repeat a. above.
Question 5 [0 marks]
Consider the following floating rate bond: it has a face value of $100. Each
half year it pays coupon based on the current market returns over the half
year that has just ended. That is, if the market returns 3% from 15 January
to 15 July then the bond pays $3.
The bond matures in 10 years’ time, at which point the $100 face value
is returned to the purchaser.
How much would you pay for this floating rate bond? Why?
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