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Business, 02.12.2019 18:51 michael11948

The current gold price for immediate delivery (i. e., gold spot price) is $1440 (bid) and $1450 (ask) per ounce. a one-year forward contract of gold trades at a forward price of $1500 (bid) and $1510 (ask) per ounce. in a long forward contract you will receive delivery of one ounce of gold in one year and you will need to pay $1510 at the time of delivery. alternatively, in a short forward position you will need to deliver one ounce of gold in one year and you will receive $1500 at the time of delivery. your one-year lending interest rate is 1% and your one-year borrowing interest rate is 3%. assume that gold has no delivery costs, no storage costs, and no short-selling costs. you expect that the gold price is going to increase to around $1600 over the next year. are there any arbitrage opportunities here? if yes, explain which transactions you need to perform and quantify the profits you make from this arbitrage. if not, explain why an arbitrage does not exist.

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