Q&A: What should the arbitrageur do? | Gold Investment Trading ...

Question: What should the arbitrageur do?

Q1. The price of gold is currently $ 1150 per ounce. Forward contracts are available to buy or sell gold at $ 1350 for delivery in one year. An arbitrageur can borrow money at 8% per annum. What should the arbitrageur do? Assume that the cost of storing gold is zero and that gold provides no income.

Q2. The current price of a stock is $ 94, and three-month European call options with a strike price of $ 95 currently sell for $ 4.70. An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 2,000 call options (20 contracts). Both strategies involve an investment of $ 9,400. How high does the stock price have to rise for the option strategy to be more profitable?

Q3. A trader buys a European call option and sells a European put option. The options have the same underlying asset, strike price, and maturity. Describe the trader?s position. Under what circumstances does the price of the call equal the price of the put?
Thanks for the clarification. The assignment requires everything in an excel spreadsheet. Wish me luck

www.goldsenze.com Answer:

Not doing all your homework, but will help get you started.

1) Borrow at 8%. Use the proceeds to buy and store gold. Sell forward contracts.
One year hence, Deliver the gold to settle the forward.

2) Profit on stock = 100 * ( P ? 94 )
Profit on options = 2000 * ( P ? 95 ? 4.70 )
Set the two profits equal and solve for P

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