
Forward Contracts 53
Solution to Problem 4.1
Step 1: Calculate the cost of carry.
Since the total cost of carry consists of opportunity and storage costs, these costs need to be calculated.
Opportunity Cost:
Amount of investment on April 1 = 12,000 × 1,000 = INR 12,000,000
Opportunity interest rate = 8% per year or 2% for 3 months
Interest lost = 12,000,000 × 2% = INR 240,000
Storage cost = INR 80,000
Total cost of carry = INR 240,000 + INR 80,000 = INR 320,000
Step 2: Calculate the cost of carry per gram of gold.
Cost of carry per gram of gold =
320,000
= INR 320
Step 3: Calculate the forward price.
Forward price = Spot price + Cost of carry = ...