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Question 1 of 30
Alessandro, a seasoned commodities trader, observes a discrepancy between the spot and futures prices of palladium. The current spot price of palladium is $1,500 per ounce. The six-month futures contract is trading at $1,600 per ounce. Alessandro\'s analysis reveals the following costs associated with storing palladium: storage costs are $50 per ounce per year, insurance costs are $10 per ounce per year, and the annual financing cost (interest) is 5% of the spot price. Assuming Alessandro can borrow funds at the given interest rate and has access to storage and insurance, which of the following strategies would allow Alessandro to execute a cash and carry arbitrage, and what would be the approximate profit per ounce upon delivery?
Buy palladium in the spot market for $1,500, sell the six-month futures contract for $1,600, and realize a profit of approximately $32.50 per ounce upon delivery.
Sell palladium in the spot market for $1,500, buy the six-month futures contract for $1,600, and realize a profit of approximately $67.50 per ounce upon delivery.
Buy palladium in the spot market for $1,500, buy the six-month futures contract for $1,600, and realize a profit of approximately $100 per ounce upon delivery.
Sell palladium in the spot market for $1,500, sell the six-month futures contract for $1,600, and realize a profit of approximately $132.50 per ounce upon delivery.