Suppose the storage cost for gold is $70 per ounce per year and the interest rate for borrowing or lending is 3% per annum, compounded continuously. Storage costs are assessed when you take delivery of the gold, but you can pay them at a later date with accumulated interest.

1. Show how you could make an arbitrage profit if the June and December futures contracts for a particular year trade at $1,350 and $1,400 per ounce, respectively.

2. Show how the arbitrage works assuming a contract size of 100 ounces. Ignore daily settlement (marking to market) in answering this question.

3. What storage cost would eliminate this arbitrage opportunity?

This is the only information that I received. Here is the work I have so far.

$1400 $1350 - t Jure 170/02 per yr = 0 i = 39 per annum (continuar comp) contract size=1000Z June Dea a Fo=Sotue. - Price cesty Price controved 2013/05 June futures contract 135o = So e 0.05 (1) +70 December futures 1400 = (So e 1.030770) +35 so 1405.4026 so = $1242.17 Scanned with CamScanner Cs