Suppose the spot price of gold is \$300 per ounce and the risk-free interest rate for one year is 5%. What is a reasonable value for the one-year forward price of gold?
The answer is \$315, right?
Suppose the one-year forward price of gold is \$340. Argue as follows: borrow 300 dollars for a year and buy one ounce of gold. Then short a forward contract to sell the gold in one year time. Show this will lead to a risk-free proﬁt (arbitrage) and the the one-year forward price of gold must be $315.
This comes down to \$340 - $315 = \$25 , right?
I suppose that the \$315 here cones again from the \$300*105% ? right?
Then assume the one-year forward price of gold is \$300. Argue as follows: sell the gold, then invest the proceeds and long a one-year forward on gold. Show again that this will lead to a risk-free proﬁt (arbitrage) and the one-year forward price of gold must be \$315.
I'm confused cause of this part. So if anybody could help?
thanks in advance
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