Question: A bank offers a corporate client a choice between borrowing cash at 7% per annum and borrowing gold at 1.15% per annum. (If gold is

A bank offers a corporate client a choice between borrowing cash at 7% per annum and borrowing gold at 1.15% per annum. (If gold is borrowed, interest must be repaid in gold. Thus, 100 ounces borrowed today would require 101.15 ounces to be repaid in one year.) The risk-free interest rate is 6% per annum, and storage costs are 0.5% per annum. The interest rates on the two loans are expressed with annual compounding, The risk-free interest rate and storage costs are expressed with continuous compounding. Assume that the price of gold is $1000 per ounce and the corporate client wants to borrow $50,000,000. Which alternative should the dient choose: the cash loan of the gold loan ? Motivate answer

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