A One-Year Gold Futures Contract Is Selling for $641

question 2

Multiple Choice

A one-year gold futures contract is selling for $641. Spot gold prices are $600 and the one year risk free rate is 6%. The arbitrage profit implied by these prices is ________.

• A)$3
• B)$4
• C)$5
• D)$6

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Definitions:

Double-declining Balance

A method of accelerated depreciation where the asset’s book value is decreased at double the rate of traditional straight-line depreciation.

Straight-line Depreciation Rate

The straight-line depreciation rate is a method of calculating the depreciation of an asset, where its cost is evenly spread over its useful life, resulting in a fixed annual depreciation expense.

Salvage Value

The estimated value that an asset will realize upon its sale at the end of its useful life.

Total Asset Cost

The sum of all costs incurred to acquire an asset and make it ready for its intended use.