The current sport price of gold is $1600 per ounce and the risk-free rate is 5% per annum for all maturities. The cost to store gold is $10 per ounce for a year, with cost payment being made at the end of the year. Assume the size of a gold futures contract is 150 ounces and the gold futures maturity is two years.

Required:

a. Calculate the price of gold futures with a maturity of two years. (4 marks)

b. Suppose the actual gold futures price is $1810 per ounce, what is the arbitrage strategy? What is the outcome of the arbitrage at the end of year two? (3 marks)

c. Suppose the actual gold futures price is $1720 per ounce, what is the arbitrage strategy? What is the outcome of the arbitrage at the end of year two? (3 marks)