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stepan [7]
3 years ago
7

The price of gold is currently $1,400 per ounce. The forward price for delivery in one year is$1,500. An arbitrageur can borrow

money at 4% per annum. What should the arbitrageur do? Assume that the cost of storing gold is zero and that gold provides no income.
Business
1 answer:
Rashid [163]3 years ago
8 0

Answer:

The arbitrageur should borrow money at 4% per annum since it is cheaper than paying the forward price for delivery

Explanation:

Current price of gold=$1,400 per ounce

Forward price=$1,500

The arbitrageur can either pay the forward price or borrow $1400 and pay the interest of 4% in a year. Consider option 1 paying the forward price of 1500

Option 1

Since there are no additional costs, the total cost for buying the gold=forward price=$1,500

Option 2

If the arbitrageur borrows the 1400 to pay for the gold now, then pay the interest in 1 year;

The total cost=Amount borrowed+interest accrued in 1 year

Total cost=1400+(4%×1400)

1400+((4/100)×1400)

1400+56=$1456

Since there are no additional costs, option 2=$1456

If we compare option 1 to option 2, we notice that option 2 is slightly cheaper than option 1 by $44

(Option 1-Option 2)=(1500-1456)=$44

The arbitrageur should borrow money at 4% per annum since it is cheaper than paying the forward price for delivery

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Answer:

Healthy Beverage Inc.

a) Differential Analysis

1) Continue Fruit Cola (Alt. 1)

Sales                            $12,750,000

Cost of goods sold         8,500,000

Gross profit                  $4,250,000

Operating expenses      6,000,000

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Operating expenses          900,000

Income (Loss)               ($3,025,000)

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The production and sale of the Fruit Cola should be continued.  Discontinuing it would not save the company the incurrence of the fixed cost.

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Differential analysis is a managerial accounting technique for analyzing the different costs and benefits that would arise from alternative solutions to a particular problem.

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