Q4. Peter spots an arbitrage opportunity in the gold forward and option market. He enters into a 90-day short forward position of 10 contracts to sell gold at the price of $1750 per ounce (1 Arbitrage contract = 100 ounces), and at the same time, buys 10 90-day call option contracts to buy gold at the price of $1650 per ounce with a premuim of $95 (1 contract = 100 ounces). with futures Suppose Peter has sufficient cash in USD but currently not holds any hold, and ingore the time value of money. Draw a chart to show the profit/loss of Peter, if the spot price for gold is in the range of $1250-$2250. Answer: Let S be the spot price for gold Profit/loss of short forward position: Profit/loss of exercising the option: Profit/loss from the long call option Total Profit/loss Spot Profit/loss from the Price forward $1,250 $1,300 $1,350 $1,400 $1,450 $1,500 $1,550 $1,600 $1,650 $1,700 $1,750 $1,800 $1.850 $1,900 $1.950 $2.000 $2,050 $2,100 $2.150 $2,200 $2.250