To estimate the forward price of gold, the cost of holding physical gold and the cost of shorting it must be considered. The formula to calculate the forward price (F) is:
=×(1+)F=S×(1+rfrl)
where S is the spot price, rf is the risk-free rate, and rl is the lease rate.
Given:
* Physical gold spot price (S) = $1,000
* Annual risk-free rate (rf) = 5% or 0.05
* Gold lease rate (rl) = 2% or 0.02
Plugging in the values:
=1000×(1+0.050.02)=1000×1.03=1030F=1000×(1+0.050.02)=1000×1.03=1030
Therefore, the best estimate of the gold forward price is $1030.