A textile company in North Carolina will need $500,000$ pounds of cotton

two months from today. The company has two choices to obtain the cotton:

$($i$)$ Purchase the cotton today at the spot price S$0=45$ cents per pound and store it for

two months. In order to store the cotton, the company will have to pay $1$

$6$ cents per

pound at the end of each month that the cotton is in storage.

$($ii$)$ Take a long position on a forward contract for delivery of the cotton in two months

at the forward price of $46$ cents per pound.

Assuming that there is an ideal money market with effective annual rate R $=(1\mathrm{.}01)121,$

which choice should the company make? Discuss the assumptions needed to reach your

conclusion