Assume That One Can Purchase Gold Bars or 6-Month Futures

question 52

Essay

Assume that one can purchase gold bars or 6-month futures on gold bars.
a. Using the law of one price, derive the relationship between the spot price of gold and the futures contract price.
b. Assume that the futures are underpriced relative to the contract price just derived. What action should an investor take?

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Definitions:

Incorporation Process

The legal concept in which the U.S. Supreme Court has applied the protections of the Bill of Rights to the states using the Fourteenth Amendment.

Fourteenth Amendment

A constitutional amendment adopted in 1868 that grants citizenship to all persons born or naturalized in the United States, including former slaves, and provides all citizens with “equal protection under the laws.”

State Restrictions

Laws or regulations imposed by state governments to limit or control certain activities or behaviors.

Establishment Clause

The Establishment Clause is part of the First Amendment to the US Constitution, prohibiting the government from making any law respecting an establishment of religion, thereby ensuring a separation of church and state.