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4. Imagine you are a portfolio manager at a large investment management firm that specializes in commodities. You observe the following for wheat: Interest rates
4. Imagine you are a portfolio manager at a large investment management firm that specializes in commodities. You observe the following for wheat: Interest rates (flat curve): 6.0% Wheat spot price: $4.0 Wheat futures price (4mo contract): $5.0 Monthly storage cost: $0.20 / month, paid at the end of each month. Convenience yield: None. (A) Why is there no convenience yield in this situation? [5] (B) What is the future value of all costs incurred if you choose to purchase the wheat and store it for 4 months? [10] (C) Assume the future value of all costs incurred if you choose to purchase wheat and store it for 4 months is $4.60 (it's not). Given the futures price for a contract that matures in 4 months is $5.00, what should you do? [10] (D) What is the future value profit from the trade described in part C? [5]
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