Finance School of management Arbitrage Opportunity when Forward Price of gold Is Too low The forward price is $320 Arbitrage Immediate Cash Cash Flow 1 Year Position Flow From now Sell short an ounce of gold $300 0-S1 buy a forward contract 0 S1-$320 Invest $300 in 1-year pure ($300) 324 discount bond Receive storage costs $6 Net cash flows 0 330320=10 uesTc 1010 Finance School of Management Arbitrage Opportunity when Forward Price of Gold Is Too Low Arbitrage Immediate Cash Cash Flow 1 Year Position Flow From Now Sell short an ounce of gold $300 0-S1 Buy a forward contract 0 S1 -$320 Invest $300 in 1-year pure ($300) $324 discount bonds Receive storage costs $6 Net cash flows 0 $330-$320=$10 – The forward price is $320