Question

The spot price of gold is currently $1,782.90 and the risk-free rate is at 8%. The gold will provide income over the next year of $30 every 3 months, but it will cost $20 per quarter to store. The storage costs will be incurred at the end of each quarter and the income payments will be received at the end of each 3 month period. Currently, a forward contract with a 9-month maturity is priced at $1,976.80. Assume regular compounding.

Is the market at, above or below full carry? Is this an example of the basis or the spread?

Answer 1

The market is currently below full carry as the storage cost outweighs the income from gold. This is an example of the basis.

Step-by-step explanation:

The market is currently below full carry because the cost of storage and the income from gold are not in balance. Full carry occurs when the income from the asset covers the cost of storage. In this case, the storage cost of $20 per quarter outweighs the income of $30 every 3 months, resulting in a net cost.

This is an example of the basis. The basis is the difference between the spot price and the forward price. In this case, the forward price of $1,976.80 is higher than the spot price of $1,782.90, indicating that the market expects the price of gold to increase over time.