The spot price of gold is 1230 per troy oz in early january, Ask an Expert

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The spot price of gold is $1,230 per troy oz. in early January, and the futures price of gold for December delivery is $1,235 per oz. Suppose that storage costs are $1 per oz. for the next 11 months, payable in arrears (when the gold is sold). The continuously compounded risk-free rate (LIBOR) is 1% per year. Assume that time to expiration is 11 months. Is there an arbitrage opportunity and, if so, what is the general arbitrage strategy?

A. No arbitrage opportunity exists.

B. Yes. Take a short position in December gold futures, sell gold short in the spot market, and invest the sales proceeds at the risk-free rate for 11 months.

C. Yes. Take a short position in December gold futures, buy gold in the spot market, and borrow at the risk-free rate for 11 months.

D. Yes. Take a long position in December gold futures, sell gold short in the spot market, and invest the sales proceeds at the risk-free rate for 11 months.

E. Yes. Take a long position in December gold futures, buy gold in the spot market, and borrow at the risk-free rate for 11 months.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92877868

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