The price of gold is currently $600 per ounce. Forward contracts are available to buy
or sell gold at $800 for delivery in one year. An arbitrageur can borrow money at 10%
per annum. What should the arbitrageur do? Assume that the cost of borrowing gold is zero
and that gold provides no income.
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Borrow $600 at 10%, buy spot gold at $600, simultaneously sell a 1 yr forward for $800.
Lock in $(800 - 660) = $140
Makes a profit provided the cost of storing gold over the year
this site is turning more and more into a homework help forum. these kids should be going to office hours instead of posting their problem sets here.
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