Example: Suppose that: The spot price of gold is $1,700 per ounce; The 1-year US interest rate is 5% per annum; No income or storage costs for gold; 1. If the quoted 1-year futures price of gold is $1,800, is there an arbitrage opportunity? Answer: Today: Open a short position (sell) a gold futures contract, and meanwhile borrow $1,700 to buy one ounce gold and hold it for one year; One year later: Deliver one ounce gold to close out the short position of futures contract, and use proceeds ($1,800) to repay the loan ($1,700+$85); This strategy generates a risk-free profit of 2. If the quoted 1-year futures price of gold is $1,680, is there an arbitrage opportunity? Answer: Today: Open a long position (buy) a gold futures contract, and meanwhile (short) sell one ounce gold with price of $1,700 and deposit the proceeds in the bank; One year later: At settlement date, pay $1,680 to fulfill the futures contract, and then use delivered one ounce gold to close short position of gold; This strategy generates a risk-free profit of Practice: Suppose that: The spot price of oil is $80 per barrel; The 1-year US interest rate is 5% per annum; The storage costs of oil are 2% per annum; 3. If the quoted 1-year futures price of oil is $90, is there an arbitrage opportunity? 4. If the quoted 1-year futures price of oil is $75, is there an arbitrage opportunity