Question 1 [10 marks] Tom is planning to use a forward contract to purchase 100 ounces of gold in two months time. The current spot price of gold is $1,960 per unit. Assume that Tom can borrow and lend at 2.5% p.a. compounded half yearly.

a. [2 marks] Use the arbitrage-free pricing principle to calculate the fair forward price for gold per ounce. Round your result to two decimal places.

b. [4 marks] Suppose that the forward price for purchase or sale of gold in two months time is $2,030 per unit. List and explain all the steps that Bob needs to undertake in order to make an arbitrage profit from a forward contract on 100 units of gold in three months time. Make sure you outline all that needs to happen on all relevant dates, as well as today.

c. [4 marks] Suppose that the forward price for purchase or sale of gold in two months time is $1,900 per unit. List and explain all the steps that Tom needs to undertake in order to make an arbitrage profit from a forward contract on 100 ounces of gold in two months time. Make sure you outline all that needs to happen on all relevant dates, as well as today.