Business, 17.06.2021 19:30 tinsey

A trader owns a commodity as part of a long-term investment portfolio. The commodityprovides no income and has no storage costs. The trader can buy the commodity for $1,250 per ounce and sell it for $1,249 per ounce. The trader can borrow funds at 5.2% per year and invest funds at 4.8% per year(both with continuous compounding).The price of a forward contract on this commodity with expiration date in one year is F. Supposethe bid and offer for theforward price are the same. Consider the following two strategies.-Strategy A: Borrow $1,250; buy one ounce of the commodity; and enter aforward contract to sell one ounce of the commodity in one year.-Strategy B: Shortone ounce of the commodity; invest the money received from sales; and enter a forward contract to buy one ounce of the commodity in one year.1) What is the traderâ€™s profit in one year if Strategy A is taken?2) What is the traderâ€™s profit in one year if Strategy B is taken?3) What is the range of Fthat would yield NO arbitrage opportunities?Hint: Although the profitsdonot depend on the spot price of the commodity in one year, you may assume it to be STif it is needed in the calculations.

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A trader owns a commodity as part of a long-term investment portfolio. The commodityprovides no inco...

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