Financial investment

The following table shows 2014 gold futures prices for varying contract lengths. Gold is predominantly an investment good, not an industrial commodity. Investors hold gold because it diversifies their portfolios and because they hope its price will rise. They do not hold it for its convenience yield.

Contract Length (months)

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3                              6                              12

Futures price                                     $1,188.5               $1,189.5               $1,190.0

Calculate the interest rate faced by traders in gold futures, assuming a zero net convenience yield, for each of the contract lengths shown above. The spot price is $1,188.2 per ounce

A company’s ADR is quoting at a discount of 20% to its domestic share price. In order to rationalize the market, the company proposes a buyback of ADRs. The company’s CFO says that it would increase the residual debt equity ratio of the company beyond 2:1. The company’s investment banker maintains  that this regulation does not apply to buyback of ADRs. Who is right?

(a) Investment Banker       (b) CFO

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