You would like to purchase 5 tons of a specific type of crops in one year via futures contract. The current price of the crop is $500 per ton. You know that the storage cost of this type of crops is $100 per ton per year, and each year 5% of the stored crops are lost due to insects and mold. i. What is the total futures price of your purchase if risk-free rate = 2%? ii. Suppose only you can pay $10 per ton per year to prevent the 5% loss due to storage. Does there exist an arbitrage opportunity? If so, explain your strategy to exploit the arbitrage opportunity and compute your arbitrage profit.

Answer rating: 100% (QA)

i To calculate the total futures price of your purchase we need to consider the cost of storage and ... View the full answer