Problem
A gold futures contract due in 2 yrs is $490 [02. while the 1 yr futures contract is $440} 02. The 2 yr interest rate is 12% pa [compounded annually) and the 1 year interest rate is 10% pa. Detail the transactions (and their cash?ows] you would take to earn riskless profits on this current spread. Assume interest cost is the only cost of carry. {hint, since you don't know the current spot price, value the 2 yr gold contract relative to the one year gold contract using the forward interest rate). Lastly show how you could replace your money market transactions with a forward T. bill.