Arbitrage and other issues in the Gold futures markets

Question 1: Arbitrage and other issues in the Gold futures markets
Q.1 Assume that today is 5/11/2020 and that you can lend/borrow at interest rates of 1% p/a (monthly compounding)
Below is the table with gold prices for May 2020 and May 2021
DATA : May 11,2020-
closing prices
Month Price
May-20 1723
May-21 1750

1. Find an arbitrage opportunity using the spot and future prices of Gold .
2. How would your answer to previous question change if you can lend/borrow at interest rates of 2% p/a (monthly compounding)
3. How would your answer to question Q.1.1 change if you can lend/borrow at interest rates of 2% p/a (monthly compounding)
and you have to pay for borrowing Gold a lending fee of 2% p/a (monthly compounding).
4. (HARD)Assuming that there are no arb. Opportunities, calculate the interval of lending rates as implied by the futures prices.
Remember , you pay a 2% p/a lending fee (monthly compounding) if you borrow Gold.
Q.2 Oil Futures
Read the quote from an article (see below). Attached is a clickable excel spreadsheet with futures oil prices for Feb 2007 and Oct 2007.
Assume that spot oil was sold on Feb7, 2007 for $57.96 per barrel and it was sold at $82 per barrel on Oct 7, 2007
Q. 2.1 Draw the future oil curves for Feb. and Oct.2007
Q. 2.2 Explain why so much oil was stored in Cushing in Feb but no oil was stored after mid-July; Are the “reasons for Cushing’s crude …disappearing are surprisingly complex…”
Q. 2.3 Why “some financial firms involved in oil trading got into the storage business”?
Q. 2.4 Given: on February 7 the spot one-year interest rate was 4%.
Using the table below, show that on February 7 the cost of one-year storage was higher than $3.68 per barrel.

Where Has All The Oil Gone? WSJ Ann Davis Oct. 6, 2007
After Sitting on Crude, Speculators Unload It. The World’s Eyes Fall on Cushing , Oklahoma .
“Since summer, one of North America’s most important oil towns (Cushing, Okla. ) has witnessed a disappearing act. The mammoth storage tanks that blanket the rolling grasslands around this remote prairie town had been filled to the brim with crude oil. (But now these tanks disappeared). Until mid-July, unprecedented conditions in the oil market had given oil companies and speculators alike a financial incentive to sock away oil in storage tanks for sale later. These days, the steel oil tankers on the outskirts of town stretch to the horizon, covering more than nine square miles. The biggest held 575,000 barrels.
… some financial firms, (that had been) involved in oil trading, got into the storage business. That gave them the means to set aside oil when the market wasn’t ripe to sell it profitably, and to take a cut as middlemen.
But the steel oil tankers … aren’t there anymore. Since May, millions of barrels of crude have been sold off, and Cushing’s inventory has fallen by nearly 35%.
The reasons Cushing’s crude has been disappearing are surprisingly complex…”

Q. 3
The article in WSJ form June 4, 2020 tells that “Yields on the China’s 10-year sovereign bonds, denominated in yuan, this week hit their highest levels since late February at about 2.83%”
Assume that on June 4, 2020 a China’s 10-year sovereign bond has a coupon rate of 4.5( with two coupon payments in a year). What is the price of the bond?
Q. 4
Find the technical details about the delivery quality standards for the Chinese hog markets futures

 

Sample Solution

 Across the globe, two of the most heavily traded and most popular commodities for investments – gold and silver – offer ample trading opportunities with high liquidity. As with any other tradable asset, arbitrage opportunities exist in precious metals trading. This article explains the basics of precious metals arbitrage trading, and provides examples of how investors and traders can profit from arbitrage in precious metals trading.Arbitrage involves the simultaneous buying and selling of a security (or its different variants, like equity or futures) to benefit from the price differential between the buy and sell price (i.e. the bid and ask spread). For example, the price of gold at Comex is $1225.

The narrator reveals that John Potter and Scratchy Wilson are different from typical frontier characters. While Potter appears like a weathered frontier man on the outside – his face is “reddened from many days in the wind and sun” (311) – his thoughts illustrate a man fraught with guilt over not telling the citizens of Yellow Sky about his marriage. Potter is a round character with complex thoughts and emotions; he would rather be anonymous, “a man hidden in the dark,” (313) instead of a “prominent person” (313) who would be mobbed by the citizens if they knew about his marriage. Because of his complex persona, Potter earns the reader’s sympathy and respect – he appears human and vulnerable, instead of the typical, flat, western sheriffs who serve as symbols of truth and justice.

Potter’s antagonist, Scratchy Wilson, also differs from stereotypical villains of the Wild West. Though he is the antagonist in The Bride Comes to Yellow Sky, he is not a devilish flat character intent on driving the sheriff out of town. While Wilson first comes across as a cantankerous drunk, the reader learns that he is usually “kind of simple,” the “nicest guy in town,” (316) according to the Weary Gentleman’s bartender. The reader learns that Scratchy issues “cries of ferocious challenge” (317) because he sees gun fighting as a game – the narrator even mentions that Wilson “was playing with this town; it was a toy for him” (318). Wilson, like Potter, is a round character – more complex than just a drunken gunman. When Wilson confronts Potter at the end of the story, he is astonished that his enemy is now married. Seeing Potter’s wife, Wilson becomes “a creature allowed a glimpse of another world,” (319) a man now reduced to a “simple child” (319) when confronted with the reality that his playmate has grown up. This climactic confrontation at the end of the story makes the reader pity Wilson – a feeling not usually reserved for the villain in a Western story.

The reader is surprised by the story’s ending because Crane’s plot builds suspense as one anticipates a classic Old West shootout between Potter and Wilson. By starting with Potter’s perspective, Crane lures the reader into a false sense of security. The worst thing that could happen, according to Potter, is facing the unsuspecting citizens of Yellow Sky. But when the reader learns that Scratchy Wilson and his dual revolvers stand in the way of Potter’s marital bliss, he or she understands that a confrontation must occur and anticipates a fight. Crane builds suspense by waiting till the last half of the story to introduce the antagonist – the reader only hears of Wilson at first through the fearful residents at the Weary Gentleman saloon. The climax of the story brings the reader’s anticipation to its zenith – when Wilson confronts Potter and demands that he will “settle with [him] my own way,” (319) the reader expects the situation to turn ugly fast. But Crane abruptly solves the problem with Wilson’s explanation and surprises the reader with a non-violent ending. The ending is effective because of Crane’s plot organization – if Wilson had been introduced immediately, the reader might infer that the man was not dangerous and the story would lack the build up of suspense.

By transforming the typical Western story, Crane illustrates the twilight of the frontier era. Scratchy Wilson is the last of the gunslingers looking for a final moment of glory, while his opponent, Jack Potter is ready to settle down. The Bride Comes to Yellow Sky is symbolic of order descending upon the Wild West, taming outlaws and sheriffs alike.

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