(Solution Download) If the spot price of gold is 980 per troy

If the spot price of gold is $980 per troy ounce, the risk-free interest rate is 4%, and storage and insurance costs are zero, what should the forward price of gold be for delivery in 1 year? Use an arbitrage argument to prove your answer. Include a numerical example showing how you could make risk-free arbitrage profits if the forward price exceeded its upper bound value.


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