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A bank offers you a choice between a 1-year cash loan at 11% pa, or a 1-year gold loan at 2% pa. For the gold loan, interest and principal repayment have to be made in gold. The risk-free interest rate is 9.25% pa and the storage cost for gold is 0.5% pa.
Compare the risk and borrowing costs associated with the cash and gold loan. Which loan do you prefer? (Hint: Don’t worry about convenience yield)

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关键词：convenience convenienc Associate borrowing PRINCIPAL

Suppose you need to borrow $100 now and after 1 year you need to pay back
cash: 100*1.1=110
gold: 102*exp((0.095+0.005)*1) = 112.45 (102 is the amount, the rest is the future price under risk neutral measure)
Clearly, cash is better.