Virginia Tech FIN FIN MISC A trader owns a commodity as part of a long-term investment…
A trader owns a commodity as part of a long-term investment portfolio. The trader can buy the commodity for $951.60 per ounce and sell it for $949 per ounce. The trader can borrow funds at 6.1% per year and invest funds at 5.5% per year. (Both interest rates are expressed with annual compounding.) For what range of one-year forward prices does the trader have no arbitrage opportunities? Assume there is no bid-offer spread for forward prices. Answer: There is no arbitrage opportunity if the forward price is in the range ($1,001.20 : $X). Find X (i.e. this range’s higher bound).
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