Suppose that gold currently trades at $684.0 per ounce. Further suppose that the price of a one-year gold futures contract is $725.0/oz. and the price of a two-year gold futures contract is $761.3/oz.

a)Assume that there are no arbitrage opportunities in the futures markets, and that gold has no cost of carry (i.e. holding gold has no costs). What are the implied interest rates for one and two years?

b)Suppose that, using the yield curve, you calculate that the forward interest rate between years 1 and 2 is 4%. Is this consistent with the gold spot and futures prices? Could you construct a portfolio that would exploit any inconsistencies? (Hint: Consider what happens if you buy the 1-year futures contract and short the 2-year futures contract.)