Gold trades at $1,200 per ounce, the risk-free rate is 4%, and storage costs of 1% of the spot price are payable at maturity. What is the one-year forward price?
Show the answer and explanation
Answer: C. $1,260.00
1,200 × 1.04 = $1,248.00 to carry the position, plus $12 of storage = $1,260.00. Storage is a cost borne by the spot holder, so it is added rather than subtracted.
Why the other options are wrong:
A. $1,248.00 - The financing alone, with the $12 of storage left out.
B. $1,236.00 - Subtracts the storage cost. Storage is a cost of carrying, so it is added to the forward price.