I have a question on forwards and future prices?

a bank offers a corporate client a choice between borrowIng cash at 11%per annum and borrowing gold at 2%per annum. (if gold is borrowed, interest must be repaid in gold. Thus 100 ounces borrowed today would require 102 ounces to be repaid in 1 year). The risk free interest rate is 9.25% per annum, and strorage costs are 0.5% annum. Discuss whether the rate of interest on the gold loan is too high or too low in relation to the rate of interest on the cash loan. The interest rate on the two loans are expressed with annual compounding. The risk free interest rate and strorage costs are expressed with continuous compunding.

I have a question on forwards and future prices?unemployment rate

If you borrow cash at 11% and invest it at 9.25%, you lose 1.75% on the trade. If you borrow in gold at 2%, and it costs you 0.5% to store it, it costs you 2.5% total.

It appears that the cost of borrowing in gold is too high versus borrowing in cash.

The question doesn%26#039;t make a lot of sense because it doesn%26#039;t take into account the price of gold. For them to be equal, the forward price of gold should be higher than the spot today, to account for the rate differential.

I have a question on forwards and future prices?

loan

hi,

when the loan is given, during that period both cost will be same in short term. in long term cash interest will be less due to inflation. but gold interest will increase in cash equivalent.

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