Hii friends

1. Hope you would enjoy the following mathematical answer. Please understand one simple clue used in finance.

2. When we need to find the future value of an asset (with continuous compounding), we use  e<sup>rt

3. When we need to find the  present value of an asset (with continuous compounding), we use e-rt</sup>

 

^{The question is again repeated with the following information.}

Q1B: Assume that the trader entered into a short forward contract and the trader is already holding the asset. The spot price of the asset is 710 cents per bushel. If the asset does not pay any dividends on the investment, but if the investor needs to spend on storage cost, calculate the storage cost (in yield terms) included in the March 2014 forward price by the trader with short position? The march 2014 forward price agreed by the trader with short position is 743.20

Solution:

The solution for the Q1A is already given yesterday.

The spot price of the asset	710.00 (cents per bushel)
Risk free rate	4.25% per annum
If the trader with short position includes only the risk-free rate, then he would have charged an amount of:	S0e0.0425x1 710 x e0.0425 x1 740.83 (cents per bushel)
But the quoted price of the trader with short position in futures / forward market	743.20
What does it indicate?	The trader included an additional 2.37 cents per bushel as the storage cost.
If it is expressed in % terms, how much it comes	S0e0.0457x1 710 x e0.0457x1   743.20
What does it imply?	The trader included 0.32% as the storage cost, while quoting his futures prices.