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It is December now. A March futures contract on 10,000 MMBtu of natural gas settled for $3.95 per MMBtu. Assume that the contract has exactly

It is December now. A March futures contract on 10,000 MMBtu of natural gas settled for $3.95 per MMBtu. Assume that the contract has exactly 3 months (0.25 years) to maturity. The spot price is $3.78. Present value of three months worth of storage costs is $.05 per MMBtu. The interest rate is 3% annually. Assume convenience yield to be zero. Use continuous compounding. a. Using the formula for commodity futures parity, F = {S + PV(c)}*erT, establish that an arbitrage opportunity exists. b. Design the arbitrage strategy. Show profit for 10,000 MMBtu, i.e. per one futures contract.

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