Future spot price calculation

[ttezcan]

my question is:

the current spot price of cotton is USD 0.7409 per pound. The cost of storing and insuring cotton is USD 0.0042 per pound per month payable at the beginning of every month. The risk free rate is 5%. A 3-month forward contract trades at USD 0.7415 per pound.

How can i calculate future spot price?

Is it like that?

0,7409* e^(0.05*0.25) + future value of storing and insuring expenses(nearly 0,0042*3=0,0126 = 0,07628

 

[ShaktiRathore]

hi
Forward price= current spot price+interest on current spot price+ FV(cost) - FV(benefits)
Forward price= current spot price*e^rt+ FV(cost) - FV(benefits)
FV(benefits)=0 and FV(cost)= 0.0042 *(e^3r/12+e^2r/12+e^r/12+1)
Forward price= current spot price*e^3r/12+ 0.0042 *(e^3r/12+e^2r/12+e^r/12)
Forward price= 0.7409*e^3r/12+ 0.0042 *(e^3r/12+e^2r/12+e^r/12)
r=5%
Forward price= 0.7409*e^.05/4+ 0.0042 *(e^.05/4+e^.05/6+e^.05/12)
Forward price= 0.7409*1.0125+ 0.0042 *(1.0125+1.0083+1.00417)
Forward price= 0.7409*1.0125+ 0.0042 *3.0249
Forward price= .7501+ .0127=.7628

if you does not include interest on cost of storing and insuring cotton,
Forward price= current spot price*e^3r/12+ 0.0042 *3
Forward price= .7501+.0126=(not much difference of only .0001)=.7627

thanks

 

[David Harper CFA FRM]

what's interesting is that the question already gives the traded forward price ("A 3-month forward contract trades at USD 0.7415 per pound"),
and asks "How can i calculate [expected?] future spot price?"

The question is looking imprecise to me as it doesn't appear to really want the future spot rate, as it gives no basis for inferring a relationship between the forward, f(0,0.25) and E[S(0.25)], or another way to go would be something about the technical difference between the observed traded price and the model implied forward (i.e., basis), which surely it is not doing, thanks,

 

[Kanth]

Hi Shakti,

Above question , in this FV( cost) =0.0042 *(e^3r/12+e^2r/12+e^r/12) calculation adding (e^2r/12+e^r/12) also ,can you pls explain ?

Thank you.