Alloyum costs $0.10 per month to store (which is paid up front)but gives a convenience yield of $0.12 per month (which is received on the maturity date).If Alloyum's spot price S is $200 per ounce and the continuously compounded interest rate r is 5 percent per year,then the six-month forward price is:

Question

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The forward price is given by:$$F_0=Se^{rT}+\frac{C}{e^{rT}-1}$$where:* $S$ is the spot price* $r$ is the continuously compounded interest rate* $T$ is the time to maturity* $C$ is the convenience yieldIn this case, we have:* $S = $200 per ounce* $r = 5%$ per year* $T = 6$ months = 0.5 years* $C = $0.12 per month = $0.72 per yearPlugging these values into the formula, we get:$$F_0=200e^{0.05*0.5}+\frac{0.72}{e^{0.05*0.5}-1}$$$$F_0=204.96$$Therefore, the correct answer is A.

Alloyum Costs $0