Gold is currently trading at $1,645.50 per ounce with a carrying cost of $1.25 per ounce per month for storage and insurance. Given a current market price of $1,693.97 per ounce for a four-month futures contract, what is the potential carry trade profit per ounce if the interest rate is 3%?
A)$1.25
B)$4.97
C)$25.39
D)$27.16
E)$30.23

Question

Quizplus · Accepted Answer

First, we need to calculate the total cost of carrying the gold for four months:

Carrying cost = $1.25/oz/month x 4 months = $5/oz

Next, we need to calculate the total interest earned on the cost of carrying the gold:

Interest earned = 3%/year x ($5/oz)(4/12) = $0.05/oz

Therefore, the potential carry trade profit per ounce is:

Profit per ounce = Futures price - Current price - Carrying cost + Interest earned 
Profit per ounce = $1,693.97/oz - $1,645.50/oz - $5/oz + $0.05/oz 
Profit per ounce = $43.47 - $5.05 
Profit per ounce = $38.42

Therefore, choice D ($27.16) is the closest answer.

Gold Is Currently Trading at $1,645