Answer to Question #252396 in Finance for Kim

Question #252396

Consider a 6-months futures contract on gold. We assume no income and that $1 per ounce per 6-months to store gold, with the payment being made at the end of the period. The spot price is $1620 and risk free rate is 2% for all maturities. How can an arbitrageur earn profit is the price of 6-month gold futures is 1630$?


1
Expert's answer
2021-10-19T15:58:05-0400

The current market price at which a specific asset, such as commodities, securities or currencies ,can be bought or sold for immediate delivery is known as the spot price. A future price is an agreed upon price for the asset's future delivery.


FV of cost of buying 1 ounce of gold in spot and storing it for 6 months= SO"\\times e^{rt}+1"


"=1620e^{0.02\\times\n0.5}+1"


=1637.28 (Gold future rate)


Hence, arbitrage profit can be made by;

  1. Short the gold in the spot market.
  2. Invest the proceeds at a risk-free rate for 6 months.
  3. Enter into 6 months future contract to buy gold at forward rate.

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