Commodity question

[ammor]

Hi David,

I just found this question taken from past exams, and i didn't understand the answer, can you please help me on this?

A trader sells $80 million worth of gold short for six months and buys $80 million worth of gold for six months delivery. This exposes the trader to a:

A. Rise in the price of gold
B. Fall in the gold borrowing rate.
C. Fall in short-term interest rates
D. Rise in the volatility of gold price.

The answer was B.

Thanks

 

[David Harper CFA FRM]

Hi ammor,

Can you see here http://forum.bionicturtle.com/viewthread/3748/
...where the question came up previously

And (because I find this question difficult myself) I keyed off Daniel's point, to view this is as almost a cash and carry arbitrage (but without the borrowed cash) in this spreadsheet: http://public.sheet.zoho.com/public/btzoho/goldshort
(right top panel) Cash and carry arbitrage (i.e., zero profit) = short forward + buy spot + borrow to buy the spot
(right bottom panel) Compare to this question = short forward + buy the spot

The reason, for me, that the question is difficult is that it refers to the gold "borrowing or gold lease rate", which moves in the opposite direction of the riskfree rate

David