Assuming Positive Basis and Negligible Borrowing Cost,which of the Following

question 21

Multiple Choice

Assuming positive basis and negligible borrowing cost,which of the following set of transactions could yield positive arbitrage profits a hedge fund might pursue?

• A) Buy gold in the spot market and sell the futures contract
• B) Buy the futures contract and sell the gold spot and invest the money earned
• C) Buy gold spot with borrowed money and buy the futures contract
• D) Buy the futures contract and buy the gold spot using borrowed money

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Definitions:

Equilibrium Price

The price at which the quantity of a product offered is equal to the quantity of the product demanded, resulting in market stability.

Quantity Demanded

The cumulative quantity of a product or service that buyers are ready and capable of buying at a certain price during a defined timeframe.

Quantity Supplied

The amount of a certain good or service that producers are willing and able to sell at a specific price.

Individual Supply Curves

Graphical representations showing the relationship between the price of a good and the quantity of the good a seller is willing to supply, holding all else constant.