When storing wheat there is spoilage, i.e. the amount of usable wheat shrinks over time. Assume...
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When storing wheat there is spoilage, i.e. the amount of usable wheat shrinks over time. Assume that wheat spoils continuously at rate of 3% per month. Also, assume that wheat storage carries fixed (upfront) costs of $0.25 per bushel, irrespective of how long you store it. You're given that today's price of wheat is $10 per bushel, interest rate is 6% annualized, continuously compounded, and the wheat forward price for delivery in 2 months is F = 11. Describe an arbitrage strategy to take advantage of this mispricing and find the correct forward price consistent with no-arbitrage. When storing wheat there is spoilage, i.e. the amount of usable wheat shrinks over time. Assume that wheat spoils continuously at rate of 3% per month. Also, assume that wheat storage carries fixed (upfront) costs of $0.25 per bushel, irrespective of how long you store it. You're given that today's price of wheat is $10 per bushel, interest rate is 6% annualized, continuously compounded, and the wheat forward price for delivery in 2 months is F = 11. Describe an arbitrage strategy to take advantage of this mispricing and find the correct forward price consistent with no-arbitrage.
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The arbitrage strategy would involve simultaneously buying the wheat today a... View the full answer
Related Book For
Managerial Accounting
ISBN: 9780073526706
12th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
Posted Date:
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