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CMA Final · Strategic Financial Management · Forwards and Futures

Spot gold is ₹60,000 per 10 g. The 6-month futures trades at ₹62,400. Annual interest rate is 6% (simple, so 3% for six months) and there is no storage cost. Which action gives an arbitrage profit per 10 g, ignoring other costs?

Buy gold in the spot market with borrowed money and sell futures, earning ₹600 per 10 g. The fair futures price is ₹61,800 after six months of financing at 3%, so the quoted ₹62,400 is overpriced by ₹600.

  1. ABuy spot with borrowed funds and sell futures; profit ₹600Correct
  2. BSell spot and buy futures; profit ₹600
  3. CBuy spot with borrowed funds and sell futures; profit ₹2,400
  4. DNo arbitrage exists

Explanation

Fair futures = 60,000 x 1.03 = ₹61,800. Futures at 62,400 is overpriced, so buy spot (borrowing) and sell futures. Profit = 62,400 - 61,800 = ₹600. Option ₹2,400 ignores financing cost.

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