Your company uses large amounts of corn in its production. You have been asked to put together a proposal to hedge exposure to the price of corn.

(a) If you expect to use 50,000 bushels of corn in September 2020, draw a diagram showing (i) the business risk of your company for different prices of corn in September 2020 and (ii) the appropriate futures contract that can hedge this risk.

(b) Using today's spot price (you can use the shortest term futures price), should you buy and store corn until September 2020 or buy corn in the futures market for September 2020 delivery (Note: ignore storage costs, assume September 2020 is 7 months away, and use an annual risk-free rate of 1.5%).

(c) Using the numbers in (b), describe in detail an arbitrage strategy for profiting from the September 2020 corn futures (assuming you can store corn or sell corn short without cost).

1. Show the cash required to enter a position for 50,000 bushels (assume the margin is $.20 per bushel)

2. Show the initial positions, the positions in September and the profit

3. Show that you earn the same arbitrage profit even if the spot price of corn is 300 or 500 in September 2020.