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What should the arbitrageur do to make a profit on gold forward contracts?

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The price of gold is currently $1300 per ounce. Forward contracts are available to buy or sell at $1400 for delivery in one year. an arbitrageur can borrow money at 6% per annum. What should the arbitrageur do? What is the arbitrage profit? Assume the cost of storing gold is zero and that gold provides no income.

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Solution Summary

This solution identifies the six steps the arbitrageur needs to make a profit.

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What the arbitrageur do is:

1. Borrow $1,300 for a year at 6%
2. Use the $1,300 to buy an ...

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