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Crunching the Numbers

Given the wide range of arbitrage strategies available, your portfolio will look very different depending upon the strategy you pick. In the first part of this section, you will look at one futures market (gold) and one options market (stock index) to see if you can find any obvious candidates for pure arbitrage. In the second part of this section, portfolios of heavily discounted closed-end funds and depository receipts will be constructed and put under the microscope for potential profits.

Futures and Options Arbitrage

Do futures contracts on commodities and financial assets obey the pricing rules preventing arbitrage? Consider, as an illustration, futures contracts on gold, a commodity with small storage costs and a high price. Table 11.1 lists the prices on futures contracts on gold listed on the Chicago Board of Trade on April 4, 2003. At the time, the spot price of gold was $324.9 an ounce; the riskless rates are listed in the table. Assuming that the storage costs are zero, the predicted or theoretical prices are estimated as follows:


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