Question

In: Finance

Suppose that the spot price of gold is $500.  The total cost of insurance and storage for...

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.

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14

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18

20

Solutions

Expert Solution

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

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