Today is January 1. Consider a July forward contract on soybeans (delivery date is July 1). The
Question:
Today is January 1. Consider a July forward contract on soybeans (delivery date is July 1).
The spot price of soybeans is 825.1 cents per bushel, you can store soybeans until July 1 for 60 cents per bushel (paid in advance) and you can borrow or lend money at a 4% rate (annualized and continuously compounded).
Questions:
(a) What must the July forward price be in order to rule out arbitrage opportunities?
(b) Suppose the July forward price is 907.5 cents per bushel. Demonstrate how you could earn costless arbitrage profits. Be sure to clearly identify the amount of your profits and when they are received.?
(c) What prevents you from repeatedly executing the arbitrage in part (b) to earn unlimited profits?
An Introduction to Derivative Securities Financial Markets and Risk Management
ISBN: 978-0393913071
1st edition
Authors: Robert A. Jarrow, Arkadev Chatterjee