Answered: The spot price of Timber is US$300. The…

The spot price of Timber is US$300. The 1-year forward price of gold is US$340. The 1-year US$ interest rate is 5% per annum. Is there an arbitrage opportunity?

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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Question

The spot price of Timber is US$300. The 1-year forward price of gold is US$340. The 1-year US$ interest rate is 5% per annum. Is there an arbitrage opportunity?

F = S (1+r)^T

Spot price (S)

Forward price (F)

Contract deliverable in years (T)

Risk-free rate of interest (r)

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