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 , , , and . What arbitrage opportunity is possible if the futures price for a contract is $1600 or $1,770?

The equilibrium price is given by

Case 1:

Today: short spot & long forward

At maturity (2-year later):

Case 2:

Today: long spot & short forward

At maturity: