Spot price for gold is $500. Forward contracts are available to buy or sell gold at $550 in one year. An arbitrageur can borrow or invest money at 5% per year. Assume that the cost of storing gold is zero and that gold provides no income. If the one year forward price for gold is $505 rather than $550, how to set up arbitrage positions? And how much is your profit?

Spot price for gold is $500. Forward contracts are available to buy or sell gold at $550 in one year. An arbitrageur can borrow or invest money at 5% per year. Assume that the cost of storing gold is zero and that gold provides no income. If the one year forward price for gold is $505 rather than $550, how to set up arbitrage positions? And how much is your profit?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Spot price for gold is $500. Forward contracts are available to buy or sell gold at $550 in one year. An arbitrageur can borrow or invest money at 5% per year. Assume that the cost of storing gold is zero and that gold
provides no income.
If the one year forward price for gold is $505 rather than $550, how to set up arbitrage positions? And how much is your profit?

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