A few questions - please help

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Salil

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1. Assume the futures price on gold for delivery in six months is $430, the interest rate is 8%, and the
cost of transacting is $5 per ounce of gold. Assume further that the lease rate on gold is zero. The
spot price of gold must then be:
(a) 398.15
(b) 413.46
(c) 447.20
(d) you cannot tell


2. Being long a call and short a put is like:
a. A long call and a short future
b. Short selling
c. Long the stock on margin
d. A short futur

3.If the implied volatility of a call is greater than what you think is the actual volatility, you should:
a. Buy the call
b. Write the call
c. Buy the put
d. Sell the stock

4.If the expected one-year rate is less than the forward rate, what should you think about doing today
if you are going to receive 1000 dollars in one year?
a. Nothing
b. Buy the one year zero, short the two year zero
c. Buy the two year zero, short the one year zero
d. Buy a futures contract on the 30-year bond and sell in two years

5.The Liquidity Premium theory says (2 are right):
a. The equilibrium 2 year rate = forward rate
b. The equilibrium 2 year rate is greater than the average of the current and
expected future short term rates
c. The expected future short term rate = the forward rate
d. The expected future short-term rate is less than the forward rate
 
Can you tell me how you get these answers. I mean the justification. I don't understand.
 
Q1 since future is trading at $430 and interest cost is 8% just discounting it for a 6 -mth period will help
430/(1.08)^(1/2)

Q2 Being long on call and short on put are bullish signs when the stock is expected to move up so whn u buy a call u will have pay the premium and whn u sell a put u will rec a premium buying a call will always be expensive and hence it means tht u have paid premuim to buy a stock in future so u are long on stock on margin.hence answer(c)

Q3 Volatility has a direct correlation with the option premium and whn the implied volatility is high which indicates the option premium is high and u expect it to come diverge to the actual volatility which means the premium shuld fall and hence to short a call is a prudent measure (sorry i wrote c) (answer is b)

Q4 In this Q it is mentioned tht the derived forward rate is more than the expected spot rate so it would make intuitive sense to invest in a longer term (year 2) by borrowing at the lower expected spot rate hence answer (c)

Q5 Liquidity premium theory says tht ppl value money in hand more than the future cash they exoect to get and hence to induce them to part with cash in hand the u have to offer them a higher rate and hence answer is (b &d)
 
hi nihag and danesh,


I'll post the answers soon. Don't have them with me right now.
 
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