To Capitalize on Your Expectation of a 10% Gold Price

question 45

Essay

To capitalize on your expectation of a 10% gold price appreciation, you consider buying futures or option contracts to speculate. The spot price of gold is $400. Near-delivery futures contracts are quoted at $410 per ounce with a margin of $1,000 per contract of 100 ounces. Call options on gold are quoted with the same delivery date. A call with an exercise price of $400 costs $20 per ounce. The rate of return on your speculation will be the return on your invested capital, which is the initial margin for futures and the option premium for options.
a. Based on your expectation of a 10% rise in gold price, what is your expected return at maturity on futures contracts?
b. Based on your expectation of a 10% rise in gold price, what is your expected return at maturity on option contracts?
c. Simulate the return of the two investments for various movements in the price of gold.

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Definitions:

Formal Operations

The final stage of cognitive development in Piaget's theory, typically beginning around age 12, characterized by the ability to think abstractly, logically, and systematically.

Jean Piaget

A Swiss psychologist known for his pioneering work in child development, specifically his theory of cognitive development that explains how children construct a mental model of the world.

Psychosocial Development

A theory proposed by Erik Erickson that suggests an individual's development is influenced by social experiences across eight stages of life from infancy to late adulthood.

Promoting Health

Activities or practices focused on encouraging and maintaining health and well-being, rather than just treating disease.