BEA602 Finance Derivatives- arbitrageur under the following conditions
(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 1500 per 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.
(B) Briefly explain why if ledgers 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.
(C) Assume that the annual borrowing rate is 2%, the spot price of West Texas intermediate (WTI) crude oil is USD 55.50 and the futures price of crude oil contracts expiring one year from today is USD 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 K on a certain date, if you currently have a short position on a put option on the same underlying asset with a strike price of K on the same date?
(E) A four-month European call option on a dividend-paying MLC stock is currently selling for AUD 5. The MLC stock price is AUD 74, the strike price is AUD 70 and a dividend of AUD 0.80 is expected in one month. The risk-free interest rate is 12% per annum for all maturities. What opportunities are there for an arbitrageur under the following conditions?