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Assume you have observed the following information for a commodity: Spot price for commodity Forward price for expiring in 1 year Interest rate for 1
Assume you have observed the following information for a commodity: Spot price for commodity Forward price for expiring in 1 year Interest rate for 1 year Storage cost $150 $162 5% p.a. semi-annual compounding $1.5 p.a. payable semi-annually in arrears Part I. Explain why it is important to differentiate investment assets and consumption assets in regards to forward price determination. (4 Marks) Part II. Given the above information, if you identify an arbitrage opportunity, present your strategy to take it. If you believe there might not be an arbitrage opportunity, explain why
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