Implied interest rate, Managerial Accounting

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Suppose the spot price of gold is $1700 per ounce. The futures price for delivery in six months is $1712, while the futures price for delivery in one year is $1720. The interest rate on 6-month loans is 1.00 percent (on an annual basis).

a. Ignoring transactions costs, does this represent an arbitrage opportunity? Why?

b. What is the implied interest rate for the first six months?

c. What is the implied forward rate six months hence? (recall computing forward rates from bonds with different maturities)

d. Suppose the spot price of gold is, instead, $1706 per ounce. Assuming gold can be sold short at a transactions cost of $3 per ounce, describe an arbitrage strategy. What are the arbitrage gains, if any?


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