July 2: The futures market for commodity A is trading $5.00 for

October delivery. The forward market for A in location y for

October is trading at - $.50 the October futures.

1. With the cost of moving the commodity, from market zto market ybeing $.20 & adding profit of $.10, what is the basis for location z for trade to take place between market zand yfor delivery in October? (i.e., commodity flow from z to y)

1. Assume you put the trade on in a).

On October 20, when our contract becomes deliverable,

the basis for location r is trading October futures - $.10, location

yis trading October futures - $.80, and basis for location z is

October futures- $.70.

The cost of moving A from location y to r is $.50 plus $.10 profit .

Futures price for A is still $5.00.

- What trade, or trades, would you put on to improve your profit?

- Transport can be sold back in the market for $.05 less than

original cost

• How much would your trading profit be (over and above

normal profit for moving A from one market to another)?

Hint: try building a mark-to-market model