Find the arbitrage-free value for the strike

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Reference no: EM132025093

Question: A ounce of gold currently sells for $1,000. The annual continuously compounded risk-free rate is 6%.

(a) Find the arbitrage-free value for the strike K for a one-year forward of gold per ounce. (Hint: This arbitrage-free strike is also called 'forward delivery price' or 'value of the forward contract at time 0')

(b) Suppose you take a long position in this one-year forward of gold with the arbitragefree strike from (a). Half a year later, the gold price is $930. Find the value of your long position at this time (half a year after you entered the contract), assuming the annual continuously compounded risk-free rate is still 6%. What is the value of the short position at this time?

Reference no: EM132025093

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