Consider a two-year futures contract on gold. We assume no income and that it costs $2.00 per ounce per year to store gold. The spot price is $1600 per ounce and the risk-free rate is 4% per annum for all maturities. This corresponds to r=0.04,S0=1600,T=2, and U= 2e0.042=1.85. What arbitrage opportunity is possible if the futures price for a contract that is $1,770? The equilibrium price is given by F0=(S0+U)erT=(1600+1.85)e0.042=$1,683.98 - F0=$1,770>F0=$1,683.98 - Today: long spot \& short forward - At maturity