8) The current spot price of gold is $1,020 per ounce. The risk free rate is 3%

Question

8) The current spot price of gold is $1,020 per ounce. The risk free rate is 3% per year. A gold futures contract has a contract size of 100 oz. Assume that anyone can borrow at the risk-free rate. (10 pts) a. What should the futures price be for a contract with a time period of exactly one year? b. Say that you observe that the contract for gold with a time period of exactly one year is actually selling for $1,060. Describe a strategy that you could use to make a profit that would exceed the risk free rate, and what profit you could earn.

Explanation / Answer

Answer: (a)

Spot Price per Ounce

Answer (b)

Answer: (a)

Spot Price per Ounce

$1,020 Risk Free Rate 3% Future Price: 1020*(1+0.03) 1050.6 Contract Size 100 Future Price Contract 105060

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