For the next three problems, assume that the continuously compounded interest rate is 6% and the...

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For the next three problems, assume that the continuously compounded interest rate is 6% and the storage cost of widgets is $0.03 quarterly (payable at the end of the quarter). Here is the forward price curve for widgets: Year 0 Dec. Year 1 Year 2 Mar. June Sept. Dec. Mar. June 3.000 3.075 3.152 2.750 2.822 2.894 2.968 6.6 6.7 6.8 a. What are some possible explanations for the shape of this forward curve? b. What annualized rate of return do you earn on a cash-and-carry entered into in December of Year 0 and closed in March of Year 1? Is your answer sensible? c. What annualized rate of return do you earn on a cash-and-carry entered into in December of Year 0 and closed in September of Year 1? Is your answer sensible? a. Suppose that you want to borrow a widget beginning in December of Year 0 and ending in March of Year 1. What payment will be required to make the transaction fair to both parties? b. Suppose that you want to borrow a widget beginning in December of Year 0 and ending in September of Year 1. What payment will be required to make the transaction fair to both parties? a. Suppose the March Year 1 forward price were $3.10. Describe two different transactions you I could use to undertake arbitrage. b. Suppose the September Year 1 forward price fell to $2.70 and subsequent forward prices fell in such a way that there is no arbitrage from September Year 1 and going forward. Is there an arbitrage you could undertake using forward contracts from June Year 1 and earlier? Why or why not? For the next three problems, assume that the continuously compounded interest rate is 6% and the storage cost of widgets is $0.03 quarterly (payable at the end of the quarter). Here is the forward price curve for widgets: Year 0 Dec. Year 1 Year 2 Mar. June Sept. Dec. Mar. June 3.000 3.075 3.152 2.750 2.822 2.894 2.968 6.6 6.7 6.8 a. What are some possible explanations for the shape of this forward curve? b. What annualized rate of return do you earn on a cash-and-carry entered into in December of Year 0 and closed in March of Year 1? Is your answer sensible? c. What annualized rate of return do you earn on a cash-and-carry entered into in December of Year 0 and closed in September of Year 1? Is your answer sensible? a. Suppose that you want to borrow a widget beginning in December of Year 0 and ending in March of Year 1. What payment will be required to make the transaction fair to both parties? b. Suppose that you want to borrow a widget beginning in December of Year 0 and ending in September of Year 1. What payment will be required to make the transaction fair to both parties? a. Suppose the March Year 1 forward price were $3.10. Describe two different transactions you I could use to undertake arbitrage. b. Suppose the September Year 1 forward price fell to $2.70 and subsequent forward prices fell in such a way that there is no arbitrage from September Year 1 and going forward. Is there an arbitrage you could undertake using forward contracts from June Year 1 and earlier? Why or why not?