Question

Suppose that today there is a one-year futures contract on gold with a price of $1100 per ounce. Today there are also one-year call options on gold with an exercise price of $1100 per ounce and one-year put options on gold with an exercise price of $1100 per ounce. If the call option has a premium of $5 and the put option has a premium of $10, are there riskless profits to be made? If so explain the transactions you would need to make in order to earn these riskless profits?

Answer 1

Now since spot and futures strike prices are all the ame i.e. $1,100 however the premiums differ, hence we can say that there are arbitrage gains possible, assuming that the convenience yields and storage costs are ignored.

Lets see how we can make arbitrage gains:
Sell a put option = Get $10
Buy a call option at the same time= Pay $5

At expiration:
Purchase asset at $1100 ( You have a call option) and sell it to carry out sold put obligation. Hence a profit of $5 can be made