Suppose there is an active lease market for gold in which arbitrageurs can short or lend out

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Suppose there is an active lease market for gold in which arbitrageurs can short or lend out gold at a lease rate of ℓ = 1%. Assume gold has no other costs/benefits of carry. Consider a three-month forward contract on gold.

(a) If the spot price of gold is $360/oz and the three-month interest rate is 4%, what is the arbitrage-free forward price of gold?

(b) Suppose the actual forward price is given to be $366/oz. Is there an arbitrage opportunity? If so, how can it be exploited?

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Derivatives Principles And Practice

ISBN: 9780078034732

2nd Edition

Authors: Rangarajan Sundaram

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Question Posted: Jan 10, 2024 01:00 AM

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Suppose there is an active lease market for gold in which arbitrageurs can short or lend out

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a The forward price of gold will be given by the formula F eT S S...View the full answer

Derivatives Principles And Practice

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