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 (spot price) and $1,400 per ounce (spot price), respectively, and show how the arbitrage works assuming a contract size of 100 ounces. Ignore daily settlement (marking to market) in answering this question.

2. What storage cost would eliminate this arbitrage opportunity?

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