Treasury and Risk Management Samples †MyAssignmenthelp.com

Question: Discuss about the Treasury and Risk Management. Answer: Determining the fairly, over and under priced future contracts: Risk free rate 0.80% Cost per ounce $ 3.00 Delivery data (months) (A) Future price per ounce (B) Current spot price (C) Discounting (D=e-0.80%*A) Exp spot price (E=(B*D)(3*A) Difference E-C Indication 1 $ 1,293.48 $ 1,280.00 0.99 $ 1,280.17 $ 0.17 Fairly priced 2 $ 1,310.66 $ 1,280.00 0.98 $ 1,283.86 $ 3.86 Overpriced 3 $ 1,318.77 $ 1,280.00 0.98 $ 1,278.50 $ (1.50) Underpriced 6 $ 1,358.99 $ 1,280.00 0.95 $ 1,277.30 $ (2.70) Underpriced From the evaluation of above calculation only the first contract is identified as fairly priced, while the rest contracts are either underpriced or overpriced. This mainly indicates that the overall futures contract needs to be drafted much better for reducing the arbitrage opportunity (Chance and Brooks 2015). Identifying the arbitrage opportunity by inspecting each contract against the spot gold price: Risk free rate 0.80% Cost per ounce $ 3.00 Delivery data (months) (A) Future price per ounce (B) Current spot price (C) Discounting (D=e0.80%*A) Exp spot price (E=(C*D)(3*A) Difference E-B 1 $ 1,293.48 $ 1,280.00 1.01 $ 1,293.28 $ (0.20) 2 $ 1,310.66 $ 1,280.00 1.02 $ 1,306.64 $ (4.02) 3 $ 1,318.77 $ 1,280.00 1.02 $ 1,320.09 $ 1.32 6 $ 1,358.99 $ 1,280.00 1.05 $ 1,360.94 $ 1.95 The overall gold futures contract could eventual help in identifying the profit that could be generated from the investment. There is relevant arbitrage opportunity that could be identified from the gold prices from today, which is seen in the above table. There is relevant arbitrage opportunity, which could be used by the individual investors to generate riskless trade from investment. From months 3 and 6 overall future price is less than spot future price, which directly allows the investors to gain extra income from their investment in futures. Bodie (2013) mentioned that increasing future price could eventually allow the investor to generate higher revenue from investment. Describing the arbitrage opportunity by combining two futures: The combination of Futures for 3 month and futures for 6 month eventually helps in identifying the Arbitrage opportunity. From the evaluation of table 1 and table 2, significant information can be gathered regarding future value and spot value of the gold contact. Difference between future contract and the expected spot price in future is relatively positive for 3 months future and negative for 2 months future.This only indicates that using 3 months future relevant arbitrage opportunity could be used by the investor for an additional benefit of $1.32. Therefore, buying future contract of 3 months and selling the spot 3 months future could eventually help in gaining and overall profit of $1.32 per gold future contract. This measure could eventually help reducing the risk from trades. However, Lam (2014) argued that assumptions in investments are subject to market risk, which could change with the changing external environment. There is an alternative strategy, where 2 months old furni ture could be sold in the current levels, whereas future spot price in two months could be bought. This could eventually help in getting a profit of $4.02 from the investments conducted in 2 months future contract. References Bodie, Z., 2013.Investments. McGraw-Hill. Chance, D.M. and Brooks, R., 2015.Introduction to derivatives and risk management. Cengage Learning. Lam, J., 2014.Enterprise risk management: from incentives to controls. John Wiley Sons.