A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits? Select one: A. Buy gold in the spot with borrowed money, and sell the futures contract. B. Buy the futures contract, and sell the gold spot and invest the money earned. C. Buy the futures contract, and buy the gold spot using borrowed money. D. Buy gold spot with borrowed money, and buy the futures contract.

Question

Business

Nick Lane

1 March, 16:22

A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits? Select one: A. Buy gold in the spot with borrowed money, and sell the futures contract. B. Buy the futures contract, and sell the gold spot and invest the money earned. C. Buy the futures contract, and buy the gold spot using borrowed money. D. Buy gold spot with borrowed money, and buy the futures contract.

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Answers (1)

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Leonel Johnson · Answer 1

A. Buy gold in the spot with borrowed money, and sell the futures contract.

Explanation:

A futures contract is an agreement to buy or sell an asset at a future date at an agreed-upon price while arbitrage is the simultaneous purchase and sale of identical goods or securities that are trading at disparate prices. There is opportunity for riskless profit in arbitrage because of the exploitation of price disparities.

Based on the above definitions, buying gold in the spot with borrowed money, and selling the futures contract since it is overpriced will yield positive riskless arbitrage profits.