Given the following information,calculate the expected arbitrage profit or loss from buying an ounce of gold today for $553 and selling a futures contract that matures in six months' time at a price of $570.Assume interest rates are 10% p.a. ,insurance costs are $20,the risk factor is 5 per cent on the cost of gold,and projected gold production over the next 12 months is 5000 ounces.
A)$0
B)($31)
C)$17
D)$31

Question

Quizplus · Accepted Answer

The expected arbitrage profit or loss is calculated as follows:Spot price of gold = $553Futures price of gold = $570Interest rate = 10% p.a.Insurance costs = $20Risk factor = 5%Projected gold production = 5000 ouncesThe expected arbitrage profit or loss is calculated as follows:Expected arbitrage profit or loss = (Futures price - Spot price) * (1 + Interest rate) - Insurance costs - Risk factor * Spot priceExpected arbitrage profit or loss = ($570 - $553) * (1 + 0.10) - $20 - 0.05 * $553Expected arbitrage profit or loss = $17 * 1.10 - $20 - $27.65Expected arbitrage profit or loss = $18.70 - $20 - $27.65Expected arbitrage profit or loss = -$31

Given the Following Information,calculate the Expected Arbitrage Profit or Loss