Upper bound on forward settlement price

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Upper bound on forward settlement price

Let's see if there's a way to make a risk-free profit.

And let me just tell you right from the get-go there's usually not that many way to make risk-free profit in the world, so this is very theoretical.

If the spot price for gold was a thousand dollars...

So the spot price literally just means the market price.

If you were to buy or sell gold today and actually exchange hands, then you would pay or sell the gold for a thousand dollars per ounce.

And let's also say that the 1-year forward settlement price is $1200 per ounce.

So if you want to buy gold one year from now, you can agree right now to buy it for $1200.

Or if you want to sell gold one year from now, you could agree right now to sell for $1200 by entering into a forward or futures contract.

And just, the other details, the interest rate to borrow money is 10%.

And the carrying cost of gold is $50 per ounce per year.

And the carrying cost means if I had an ounce of gold, and I wanted to hold it responsibly, I wanted to store it, maybe someplace in a safe at a bank, and I wanted to insure it in case it got stolen or in case someone lost it, that would cost me $50 per ounce per year.

So that's what we mean by carrying cost.

And let's say you could also invest money risk-free in this type of a market...

(I've just made up these numbers) for 5% a year.

So how could you make the money?

Well, you could, and we're assuming you start with nothing, so you could literally just borrow $1000.

And then you use that to buy an ounce of gold in the spot market.

So you buy one ounce of gold.

And you also agree to sell it in the future.

So you enter into that forward contract.

So you enter into forward as the seller.

So you are, on the spot market, you are the buyer.

And on the forward market, one year from now, you agree to be the seller.

So let's just think about how this is going to play out.

So over the course of the year, you will have some cost.

You will have to pay the interest on this $1000. That's 10%.

So you're going to have to pay $100 in interest.

And you're going to have to pay the carrying costs.

$50 per ounce. So, $50 carrying cost. And so, when we end up a year from now, you can sell, you will sell the gold for $1200.

One year from now. And you know you can do that, because you entered into the forward agreement.

And then you can pay back the $1000 loan plus $100 interest.

And let's say you had to pay the carrying cost at the end of the year to the bank.

So plus the $50 carrying cost.

So how much did we profit?

Well, we get $1200 and we had to pay back $1150.

So we make... So, $1200 minus $1000 minus $100 minus $50...

We make a profit of $50.

So the big takeaway here is... that these type of things here normally don't exist!

If they did, people would do it all day and all night.

And this price would go up because everyone would want to buy on spot... and this price would go down because everyone would want to sell on the futures market.

Everyone would want to do this right here.

So the appropriate price is this one should not... this price, based on these numbers right here, should not be any higher than $1150.

So the correct market price here, if we didn't want risk-free profit, or essentially what the arbitragers would make happen by kind of taking advantage of this... it would eventually go to $1150.

So it's essentially the spot price, plus the cost to borrow money at that spot price, plus the carrying cost.

So that's essentially what would be the rational price for the futures contract, Or the forward settlement price.

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Upper bound on forward settlement price발음듣기

다른 번역문 등록

Let's see if there's a way to make a risk-free profit.발음듣기

다른 번역문 등록

And let me just tell you right from the get-go there's usually not that many way to make risk-free profit in the world, so this is very theoretical.발음듣기

다른 번역문 등록

If the spot price for gold was a thousand dollars...발음듣기

다른 번역문 등록

So the spot price literally just means the market price.발음듣기

다른 번역문 등록

If you were to buy or sell gold today and actually exchange hands, then you would pay or sell the gold for a thousand dollars per ounce.발음듣기

다른 번역문 등록

And let's also say that the 1-year forward settlement price is $1200 per ounce.발음듣기

다른 번역문 등록

So if you want to buy gold one year from now, you can agree right now to buy it for $1200.발음듣기

다른 번역문 등록

Or if you want to sell gold one year from now, you could agree right now to sell for $1200 by entering into a forward or futures contract.발음듣기

다른 번역문 등록

And just, the other details, the interest rate to borrow money is 10%.발음듣기

다른 번역문 등록

And the carrying cost of gold is $50 per ounce per year.발음듣기

다른 번역문 등록

And the carrying cost means if I had an ounce of gold, and I wanted to hold it responsibly, I wanted to store it, maybe someplace in a safe at a bank, and I wanted to insure it in case it got stolen or in case someone lost it, that would cost me $50 per ounce per year.발음듣기

다른 번역문 등록

So that's what we mean by carrying cost.발음듣기

다른 번역문 등록

And let's say you could also invest money risk-free in this type of a market...발음듣기

다른 번역문 등록

(I've just made up these numbers) for 5% a year.발음듣기

다른 번역문 등록

So how could you make the money?발음듣기

다른 번역문 등록

Well, you could, and we're assuming you start with nothing, so you could literally just borrow $1000.발음듣기

다른 번역문 등록

And then you use that to buy an ounce of gold in the spot market.발음듣기

다른 번역문 등록

So you buy one ounce of gold.발음듣기

다른 번역문 등록

And you also agree to sell it in the future.발음듣기

다른 번역문 등록

So you enter into that forward contract.발음듣기

다른 번역문 등록

So you enter into forward as the seller.발음듣기

다른 번역문 등록

So you are, on the spot market, you are the buyer.발음듣기

다른 번역문 등록

And on the forward market, one year from now, you agree to be the seller.발음듣기

다른 번역문 등록

So let's just think about how this is going to play out.발음듣기

다른 번역문 등록

So over the course of the year, you will have some cost.발음듣기

다른 번역문 등록

You will have to pay the interest on this $1000. That's 10%.발음듣기

다른 번역문 등록

So you're going to have to pay $100 in interest.발음듣기

다른 번역문 등록

And you're going to have to pay the carrying costs.발음듣기

다른 번역문 등록

$50 per ounce. So, $50 carrying cost. And so, when we end up a year from now, you can sell, you will sell the gold for $1200.발음듣기

다른 번역문 등록

One year from now. And you know you can do that, because you entered into the forward agreement.발음듣기

다른 번역문 등록

And then you can pay back the $1000 loan plus $100 interest.발음듣기

다른 번역문 등록

And let's say you had to pay the carrying cost at the end of the year to the bank.발음듣기

다른 번역문 등록

So plus the $50 carrying cost.발음듣기

다른 번역문 등록

So how much did we profit?발음듣기

다른 번역문 등록

Well, we get $1200 and we had to pay back $1150.발음듣기

다른 번역문 등록

So we make... So, $1200 minus $1000 minus $100 minus $50...발음듣기

다른 번역문 등록

We make a profit of $50.발음듣기

다른 번역문 등록

So the big takeaway here is... that these type of things here normally don't exist!발음듣기

다른 번역문 등록

If they did, people would do it all day and all night.발음듣기

다른 번역문 등록

And this price would go up because everyone would want to buy on spot... and this price would go down because everyone would want to sell on the futures market.발음듣기

다른 번역문 등록

Everyone would want to do this right here.발음듣기

다른 번역문 등록

So the appropriate price is this one should not... this price, based on these numbers right here, should not be any higher than $1150.발음듣기

다른 번역문 등록

So the correct market price here, if we didn't want risk-free profit, or essentially what the arbitragers would make happen by kind of taking advantage of this... it would eventually go to $1150.발음듣기

다른 번역문 등록

So it's essentially the spot price, plus the cost to borrow money at that spot price, plus the carrying cost.발음듣기

다른 번역문 등록

So that's essentially what would be the rational price for the futures contract, Or the forward settlement price.발음듣기

다른 번역문 등록

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