FIN405_LAMIA

Kingdom of Saudi Arabia

Ministry of Education

Saudi Electronic University

College of Administrative and Financial Sciences

Assignment 3

Due Date: 25/04/2026 @ 23:59

Course Name: Financial Derivatives Course Code: FIN-405

CRN: Assignment Title: Futures Arbitrage on Gold

(Group Project Simulated Activity)

Semester: Second Academic Year: 2025-26th

Role Division

Student Name Student ID Assigned Part Section Title

Part A

Part B

Part C

Part D

For Instructors Use only

Instructors Name:

Assigned Part Individual Section Grade 8 Group effort Grade 2 Presentation Grade 10 Total Grade 20 Level of Marks

Part AHigh/Middle/Low

Part BHigh/Middle/Low

Part CHigh/Middle/Low

Part DHigh/Middle/Low

Average Grade (Group Overall)High/Middle/Low

Important Guidelines -Please read carefully

General Instructions

Submit the assignment through Blackboard (Word format only) via the designated folder.

Submissions via email or late submissions will not be accepted.

Make sure your work is clear, wellstructured, and includes your complete details on the cover page.

Plagiarism or use of AI-generated content will result in a grade of zero.

All answers must be typed in Times New Roman (size 12, doublespaced).

Activity: Practical Application

Background

Suppose you are an analyst at a commodities trading firm that specializes in arbitrage strategies. The firm monitors gold prices in both the spot market and the futures market to identify potential mispricing opportunities.

As of today (T):

Spot Price of Gold (S): $2,000 per ounce

3-Month Gold Futures Price (F): $2,080 per ounce

Risk-Free Rate (r): 6% per annum (0.06), continuously compounded

Storage Cost: $2 per ounce per month

No convenience yield

Each futures contract represents 100 ounces of gold.

Based on this context, prepare a report addressing the following parts:

Part A: What market conditions could cause the futures price to deviate from its theoretical value?

Why does arbitrage play an important role in maintaining futures market efficiency?

Part B: Recalculate the arbitrage profit if the risk-free rate drops to 4%.

What would happen if storage costs were higher or if there was a convenience yield?

Part C: What types of risk could affect this arbitrage strategy in practice (e.g., execution risk, funding

risk, basis risk)?

How could an unexpected change in interest rates or gold prices affect the position before

maturity?

Part D: How would this strategy differ if the futures were underpriced relative to the spot price?

Can you identify a real-world example where a similar arbitrage was used successfully (or

failed)?

Exception: If a group consists of three members, Part D (Challenges and Implications) may be omitted. The main conclusions should be briefly summarized in the final paragraph of the report. This adjustment will not affect grading, as the remaining sections cover all essential components of the project.

Group Assignment Guidelines

This is a group assignment consisting of four students per group. Each student is responsible for completing one of the four parts above. After all members finish their individual sections, the group must cooperate and integrate the content into a single cohesive report that includes an introduction, the four body sections, and a conclusion.

Each student should ensure their part is unique, avoids duplication, and complements the contributions of their group members.

Presentation Guidelines

Each group will deliver a short presentation (up to 12 minutes) summarizing their report and key findings.

Four marks will be allocated for the overall quality, organization, and clarity of the presentation.

Three marks will be awarded based on each students ability to clearly explain their own section and respond to questions related to it.

Three marks will be awarded for each students understanding of the other sections prepared by group members, including the introduction and conclusion, demonstrated through answering related questions.

Note: Slides used during the presentation should be included as images at the end of the report.

Total: 10 marks for the written report + 10 marks for the presentation (20 marks overall).

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