It is now January. The current interest rate is 6.4%. The June futures price for

Question

It is now January. The current interest rate is 6.4%. The June futures price for gold is $1485.80, while the December futures price is $1,494. Assume the June contract expires in exactly 6 months and the December contract expires in exactly 12 months a. Calculate the appropriate price for December futures using the parity relationship? (Do not round intermediate calculations. Round your answer to 2 decimal place.) Price for December futures s b. Is there an arbitrage opportunity here? O Yes O No References eBook & Resources Workshee Learning Objective 17-04 Design arbitrage strategies to exploit futures market mispricing Check my work

Explanation / Answer

a). FDec = FJune(1 + rf)1/2

= $1,485.80 x (1.064)1/2 = $1,485.80 x 1.0315 = $1,532.61

b). The actual futures price for December is too high relative to the June price. You should short the December contract and take a long position in the June contract.

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