What is the arbitrage-free forward price of gold

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Please help by answering the following questions. Please show any work necessary and provide detailed reasonings.

Suppose there is an active lease market for gold in which arbitrageurs can short or lend out gold at a lease rate of 1%. Assume gold has no other costs/benefits of carry. Consider a three-month forward contract on gold.

a. If the spot price of gold is $360/oz and the three-month interest rate is 4%, what is the arbitrage-free forward price of gold?

b. Suppose the actual forward price is given to be $366/oz. Is there an arbitrage opportunity? If so, how can it be exploited?

Reference no: EM132069805

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