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Suppose the spot price of a bushel of wheat is $2.00, the annual storage cost is...

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Finance

Suppose the spot price of a bushel of wheat is $2.00, the annualstorage cost is $0.30 per/bushel, the risk?free rate is 8%, and thecosts of transporting wheat from the destination point specified onthe futures contract to a local grain elevator, or vice versa, is$0.01/bu.

a. Use the cost?of?carry model to determine the equilibriumprice of a September wheat futures contract (expiration of T =0.25).

b. Explain the arbitrage strategy an arbitrageur would pursue ifthe September wheat contract is trading at $2.16/bu.

Answer & Explanation Solved by verified expert
3.6 Ratings (436 Votes)
1 Futures price refers to the price of financial or consumption asset which is computed as taking base of the spot price of such asset as well as taking into account of the other costs Future price shall be computed by taking interest rate into account for the maturity period given in the    See Answer
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Transcribed Image Text

Suppose the spot price of a bushel of wheat is $2.00, the annualstorage cost is $0.30 per/bushel, the risk?free rate is 8%, and thecosts of transporting wheat from the destination point specified onthe futures contract to a local grain elevator, or vice versa, is$0.01/bu.a. Use the cost?of?carry model to determine the equilibriumprice of a September wheat futures contract (expiration of T =0.25).b. Explain the arbitrage strategy an arbitrageur would pursue ifthe September wheat contract is trading at $2.16/bu.

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