You Have Been Asked to Determine the Theoretical Bounds on a Futures

question 54

Essay

You have been asked to determine the theoretical bounds on a futures contract on gold.You are supplied with the following information: spot price of gold = $400/troy oz.; time to expiration on futures contract = 6 months; riskless rate = 10%; borrowing rate for marginal investor = 12%; lending rate for marginal investor = 8%; storage costs for gold = $20/troy oz.per year.Short sellers can hope to recover only half of the storage costs that they save by short selling.
a. What is the upper bound on the theoretical futures price?
b. (Recalculate the new bounds.)
b. What is the lower bound on the theoretical futures price?
c. Assume that investors are required to put up a 10% margin on all futures transactions and that only cash (no T-bills) can be used to meet margin requirements. Evaluate the effect this would have on the upper and lower bounds you estimated in part a and part

---

Definitions:

Cooperation

The process of working together towards the same end or goal, often resulting in mutual benefit.

Equal Status

The condition or state where all individuals within a group or society are regarded and treated as having the same worth and rights.

Common Goals

Objectives or aims shared by a group of people, which often drive collaboration and collective action.

Supportive of Authorities

An attitude or behavior that demonstrates trust and compliance towards individuals in positions of power or authority.