1. Consider the following scenario:
Current spot price of gold = $450
Current futures price for delivery in three months = $452
Risk free rate = 4.85%
Assume the following strategy:
a. We short sell one ounce of gold today and invest the proceeds at the risk free rate for three months.
b. We take a long futures position for three months for one ounce of gold
c. In three months when the futures contract matures, we retire the short sale, and our investment matures.
Evaluate the cash flows for current period as well as for three months from now. Based on the above numbers, is $452 the “correct” futures price in a no-arbitrage sense? Explain.