Q: The price of gold is currently $600 per ounce. The forward price for delivery in 1 year is $800. An arbitrageur can borrow money at 10% per annum. What should the arbitrageur do? Assume that the cost of storing gold is zero that that gold provides no income.

A: Theoretically, the forward price should be (1 + 10%) * 600 = $660. Since $660 < $800, an arbitrageur should borrow money to buy gold, and short gold forward. Suppose the arbitrageur borrows money to buy one ounce, then the cash flows at present and future are as below:

Cash flow at present:
Buy gold:         -$600
Sell forward:  0

Cash flow one year later:
Sell gold at predefined forward price:     +$800
Payback the money one year before:   -$660

Therefore, the profit one year later is 800-660 = $140 per ounce.

Hehe, it's always easy to just calculate. By the time calculation is done, the arbitrage chance has gone away long before......