19. Spot-Futures Arbitrage (LO3, CFA3) Suppose unleaded gasoline is currently trading at $3 per gallon. You face an interest rate of 4 percent and a carrying cost of $.07 per gallon per month.

The current market price of a four-month futures contract on gasoline is $3.50 per gallon. You are evaluating a three-month carry trade opportunity.

a. Determine the present value of the storage costs (PVSC).

b. Identify what the futures price should be under spot-futures parity.

c. Explain the trades necessary to conduct the carry trade and calculate the potential profit per gallon.