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Answer: Buy silver in the spot market and enter into a 6-month forward contract to sell silver.
C is correct. The relationship between the forward price and spot price of an investment asset with no income and no applicable storage costs can be evaluated with the basic no-arbitrage formula, F=S(1+R)'. In this case we find that 25 > 24.7 * (1.02) ^ 0.5 = 24.95, so the manager can capture an arbitrage profit by borrowing at the risk-free interest rate, buying silver in the spot market, and selling the silver with a 6-month forward contract. A, B, and D are incorrect by the logic given in the correct answer.
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A precious metals trading investment fund's portfolio manager is evaluating the prevailing silver market prices to identify potential arbitrage opportunities. The current spot price for silver stands at USD 24.70 per ounce, and the price of a 6-month forward contract is USD 25.00 per ounce. Given an annual risk-free interest rate of 2%, and assuming there are no lease rates, storage costs, or convenience yields to factor in, what specific trade strategy should the manager adopt to secure an arbitrage profit?
A
There is no arbitrage opportunity in the silver market.
B
Sell silver in the spot market and enter into a 6-month forward contract to buy silver.
C
Buy silver in the spot market and enter into a 6-month forward contract to sell silver.
D
Buy silver in the spot market and enter into a 6-month forward contract to buy silver.