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4) Forward pricing Today, the price of gold is 1'827 USD per ounce. The USD risk-free interest rate for one year is 0.25% p.a. (cont.

4) Forward pricing

Today, the price of gold is 1'827 USD per ounce. The USD risk-free interest rate for one year is 0.25% p.a. (cont. comp., identical for borrowing and lending), and storage plus insurance costs for gold are 0.29% p.a. (cont. comp.).

a. What is the theoretical one-year forward price of gold?

b. Suppose you observe a one-year forward price of gold of 1'807 USD per ounce. Describe the trades that are required to create a risk-free arbitrage in this situation and calculate the resulting arbitrage profit in USD per ounce.

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