In: Finance
Suppose that the spot price of gold is $500. 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 $650, how much money could you make from arbitrage at expiration of the forward? Hint: Use an arbitrage table after you figure out the appropriate arbitrage portfolio.
12 |
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14 |
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16 |
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18 |
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20 |
Spot Price | 500.00 | |
Insurance and storage in advance | 30.00 | |
Total | 530.00 | |
Borrowing rate | 20% | |
Amount payable after 1 year | 530*(1+20%) | |
636.00 | ||
Sale price after 1 year | 650.00 | |
Arbitrage Gain= | 650-636 | |
Arbitrage Gain= | 14 | |
So option B is correct | ||