a) You need to borrow $750,000 for exactly one year. Your bank has given you the choice of either borrowing cash at 10.25% p.a. or gold at 2.5% p.a., with both rates being compounded annually (hint: as they are compounded annually, these rates are the effective charges for borrowing). The current spot price of gold is $1,500 an ounce. If you choose to borrow gold, you will borrow exactly enough to give you $750,000 once you convert it to cash at the spot price. Further, if you borrow gold, at the end of the year, you must repay the loan in gold, including the interest. The risk free rate of interest is 5.5% p.a. continuously compounded, storage costs for gold are 1.5% p.a. continuously compounded. Given this option, would you prefer to borrow the $750,000 in cash or gold?

b) Now that you have decided whether to borrow in cash or gold, you have decided not to follow Steves advice, and will start speculating on the price of platinum. Looking at the platinum market you see you can buy platinum for $1,400 an ounce and can sell platinum for $1,380 an ounce. Looking at the interest rate markets, you also see that you can borrow cash at 7.2% p.a. and invest cash at 5.7% p.a. (both interest rates are continuously compounded). Further the storage costs of platinum are 2% p.a. continuously compounded. Given this information, what would the twoyear forward prices on platinum need to be for there to be arbitrage opportunities available in this market?