The price of gold is currently $1,200 per ounce. Forward contracts are available to buy or sell gold at $1,400 per ounce for delivery in one year. An arbitrageur can borrow money at 10% per annum. Assume continuous compounding.
Clearly outline the trading strategy to exploit the profitable arbitrage opportunity, if any. What is the profit (per ounce)?
- How does your answer change if storage costs of 2% per annum are incurred? What is the profit (per ounce)?
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The price of gold is currently $1,200 per ounce. Forward contracts are available to buy or sell gold...
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