Today’s spot price of silver is $30 per ounce. The simple interest rate is 6 percent per year. The quoted six- month forward price for silver is $32. Transaction costs are $0.10 per ounce whenever spot silver is traded and a $0.25 per ounce one- time fee for trading forward contracts but no charges for trading bonds.

a. Demonstrate how you can make arbitrage profits in this market if there are no transaction costs.

b. If you have to pay transaction costs, demonstrate how you will make arbitrage profits or explain why you cannot make any such profits.