A one-year gold futures contract is selling for $641. Spot gold prices are $600 and the one year risk free rate is 6%. The arbitrage profit implied by these prices is ________.

Question

Quizplus · Accepted Answer

The difference between the cost of owning and storing an ounce of gold and the futures price of gold is known as the cost of carry.

The cost of carry is given by (Futures price) = (Spot price) + (Cost of carry)

In this case, the futures price is given as $641, and the spot price is $600. The cost of carry is (641-600) = $41.

The risk-free rate of interest is given as 6%. Using the formula for calculating the futures price, we get:

(Futures price) = (Spot price) x (1 + Risk-free rate) = 600 x (1 + 0.06) = $636

As per the given information, the futures price is $641, which exceeds the cost of carry by ($641 - $636) = $5.

Therefore, an arbitrage profit of $5 is implied by these prices. The correct choice is (C).

A One-Year Gold Futures Contract Is Selling for $641