Exam 2016-FRR Topic 3 Question 17 Discussion

Actual exam question for GARP's 2016-FRR exam
Question #: 17
Topic #: 3
When the cost of gold is $1,100 per bullion and the 3-month forward contract trades at $900, a commodity trader seeks out arbitrage opportunities in this relationship. To capitalize on any arbitrage opportunities, the trader could implement which one of the following four strategies?

Suggested Answer: A Vote an answer

When the cost of gold is $1,100 per bullion and the 3-month forward contract trades at $900, the price difference indicates an arbitrage opportunity. The trader can capitalize on this by:
* Short-Selling Physical Gold: The trader borrows gold and sells it at the current market price of $1,100 per bullion.
* Long Position in Futures Contract: Simultaneously, the trader takes a long position in the futures contract at $900, agreeing to buy gold at this lower price in three months.
At the end of the 3-month period, the trader fulfills the futures contract by purchasing gold at $900 and delivers it to settle the short position, securing a profit from the price differential.

by Harley at Jun 04, 2025, 05:58 PM

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