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The current price of silver is $45 per ounce and the cost of storing this silver is $1 per ounce payable at the end of 9 months. Assuming that interest rates are 12% per annnum continuously compounded for all maturities, what is the upper bound for the futures price of silver for delivery in one year?a)$57.82b)$51.77c)$41.82d)$47.77

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hoangkhangpham94

Answer:

The answer is b)$51.77.

Explanation:

The upper bound of future price is equal to the future value of:

- The current price of silver compounded continuously for one-year ( that is, one period); plus

- The future value of the storing cost compounded continuously for 0.25 year ( that is, 3 months calculated as 12 months minus 9 months).

Thus, upper bound of future price is calculated as below:

45 x e^12% + 1 x e^[12% x(3/12)] = 50.737 + 1.030 = $51.77 ( round to 2 decimal places).

So, the answer is b) $51.77.

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