The current spot price of Copper is $2.7445 per pound. Thestorage costs are $0.05 per pound per year payable monthly.Physical holding of copper now can yield $0.13 per pound per yearwhich is achievable monthly. The price of a 9-month futurescontract of copper is currently listed as 2.7685. Assume thatinterest rates are 10% per annum and monthly compounded.
a) If the cost-of carry relationship is held under no-arbitrageconditions, what should the 9-month futures price be (4 d.p.)?
b) Is the listed 9-month futures price provide arbitrageopportunity (assume transaction costs are negligible)? Justify.
c) If the listed futures price is correct, what would be theunderlying annual yield.
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