An Australian bank offers a corporate client a choice between borrowing cash at 3.75% per annum or borrowing gold at 2% per annum. If gold is borrowed, interest must be repaid in gold. Thus, 100 ounces borrowed today would require 102 ounces to be repaid in one year. The interest rates on the two loans are expressed with annual compounding. The risk-free interest rate is 2.25% per annum and storage costs are 0.5% per annum. The risk-free interest rate and storage costs are expressed with continuous compounding. We assume that the price of gold is AUD 2671 per ounce and a corporate client wishes to borrow AUD 2,671,000.

i) Discuss whether the rate of interest on the gold loan is too high or too low in relation to the rate of interest on the cash loan.

ii) What should be the correct rate of interest for the gold loan?