Problem 3. (Commodity forwards, 10)

Assume that the forward price of corn for delivery in exactly three months from today is $2.80/bushel. The current spot price of corn is $2.60. The current three-month risk-free rate for borrowing and lending is 5.0% annualized and continuously compounded. (a) Corn is a perishable commodity with a traditionally low convenience yield, so assume that the convenience yield is zero. Find the storage cost of corn (including storage, spoilage, insurance, etc.) that is annualized and continuously compounded over the 2 next three months, assuming that this is a known value that is independent of the cost of corn. (5)

(b) Assume your cost of storage is 12% annualized and continuously compounded, as opposed to the number you inferred in part (a). Construct an arbitrage table that illustrates how you would take advantage of the apparent mispricing of the forward. (5)