Investment Banking: Gold Trading, Futures and Options

Arbitrage Opportunities for Investment Bankers

QUESTION 1(A)Mr. Brown is an investment banker who holds gold as part of a long-term investment asset in his portfolio. Mr. Brown can buy gold for USD 1500per ounce and sell gold for USD 1498 per ounce. Mr Brown can borrow funds at 6% 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 of gold does Mr. Brown have no arbitrage opportunities? Assume there is no bid–offer spread for forward prices. (05 marks)(B) Briefly explain why if hedgers tend to hold short positions and speculators tend to hold long positions,the futures price of an asset will be below the expected spot price. 3(C) Assume that the annual borrowingrateis2%, the spotpriceofWest Texas intermediate (WTI) crudeoilisUSD 55.50andthefuturespriceofcrudeoilcontractsexpiringoneyearfromtodayisUSD 50.50.Calculate the convenience yield of (WTI) crude oil for delivery one year from today.(D)How would you create an equivalent position to a long forward contract to buy an asset at Kon a certain date, if you currently have a short position on a put option on the same underlying asset with a strike price of Kon the same day material. Q1 will be comprised of 25 MCQs whilst Q2-4 will examine your quantitative knowledge. When answering Q2-4 show all your working and mathematical reasoning whilst ensuring they are written in a clear and concise manner. All working out ananswers must be HANDWRITTEN. Marks will be allocated as follows: Q1 – 25 marks Exam instructions, tested topics and past year paper attached.