Suppose that the spot price of gold is US$1,700 per ounce. The quoted 1- year forward price of gold in the market is US$1,800, whereas it should have been $1,785. The 1-year US$ interest rate is 5% per annum. On the basis of the given information, answer the following:

a) Is there an arbitrage opportunity? Why?

b) If there is an arbitrage opportunity, show how will you exploit it? What will be the arbitrage profit?

Hint: Recall that arbitrage means exploiting mispricing in the market to your advantage and any profit thus gained is risk-free. Use this understanding to formulate a response to this question.