Use the following data for the next problems. Corn contracts are 5,000 bushels p
ID: 3184741 • Letter: U
Question
Use the following data for the next problems.
Corn contracts are 5,000 bushels per contract, and the quote is dollars per bushel. Gold contracts are 100 ounces per contract, and the quote is in dollars per ounce.
Settlement Spot Dec16 Mar17 May17 Jul17 Sept17
Corn 3.43 3.32 3.43 3.50 3.58 3.66
Gold 1167.45 1166.8 1172.3 1176.1 1179.4 1180.6
For each commodity draw the forward curve. The spot price of gold on December 1st is $1,170. Construct a forward curve for the next six months (Dec, Jan, Feb, Mar, Apr, May) assuming that carry arbitrage is possible. The current risk free rate is 2% and the cost of carrying is 2.
Explanation / Answer
ANSWER:
Cost of Equity = Rf + beta x MRP = 5% + 1.2 x 6% = 12.20%
Stock Price in year 10 = D11/(r - g) = 5.32/(12.20% - 3%) = $57.78
It value today = 57.78/1.122^10 = $18.27
Now, take the present value of the dividends using NPV formula NPV(12.2%, 2.38...5.16) = $18.66
Total Value = 18.66 + 18.27 = $36.93
1 2 3 4 5 6 7 8 9 10 11 Dividend 2.38 2.59 2.82 3.08 3.35 3.66 3.99 4.34 4.73 5.16 5.32Related Questions
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