Suppose that the spot price of gold is $600. The total cost of insurance and storage...

Suppose that the spot price of gold is $600. The total cost of insurance and storage for gold is $30 per year, payable in advance. The rate of interest for borrowing or lending is 20%. If the forward price is $700, and you are interested in arbitrage, you would: (Hint: Check answer with an arbitrage table)

		Sell the spot commodity, lend money, and buy a forward contract
		Borrow money, buy the spot commodity, and buy a forward contract
		Borrow money, buy the spot commodity, and sell a forward contract
		Sell a forward contract, lend money, and buy the spot commodity
		Sell a forward, lend money, and sell the spot commodity

Solutions

Expert Solution

Its inflationary condition with the cost of holding commodity is high hence arbitrage would be

Sell the spot commodity, lend money, and buy a forward contract

With this he will sell the commodity getting the money which is invested from which he will get get the returns and buy the forward contract so that he can get his commodity back after the time frame

jeff jeffy answered 2 years ago

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