# Explain how Arbitrage its useful in financial markets today.

Arbitrage Using Futures
Arbitrage is one of the most common tools used in financial markets today. Given assignment will utilize the concept of arbitrage opportunity, using gold as a trading asset in general and gold futures prices in particular. By applying law of one price, gains from futures trading are expected to be derived. Calculations will indicate benefits using arbitrage.
For the purpose of the study, USD 100 000 thousand was assumed to be the starting capital. Interest rate was set at 5 percent, and transaction per contract at USD 25 per contract. Time frame was also set at 365 days. Primary step of the case is to record spot and future prices of the commodity. Gold was used as main commodity for the purpose of the task. Future price of gold for the closest month (April 2015) of USD 1 182.7 was assumed as the spot price for the case. Future price of USD 1 196.3 was recorded for December 2016, 610 days away from the current day.
Table 1. Input data and calculation of spot-future parity
Indicator Unit Value
Funds available USD 100 000,0
Interest rate % 5%
Transaction cost per contract USD 25,0
Time days 365

Spot price USD 1 182,7
Futures price (Dec 2016) USD 1 196,3
Time to maturity days 610
F USD 1 285,8

Next step of the case was calculating spot-future parity in order to determine whether arbitrage opportunity was present. Spot-future parity is an application of the law of one price, dictating that same good should be sold at the same price in different locations. F is the future price of a commodity, which differs from the spot price of the contract S with cost of using money and holding an asset. Therefore, in case there is difference between the current purchase price and future price F, there is an arbitrage opportunity.
Figure 1. Gold futures quotes,

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