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Problem 2 a) The September wheat futures price is $7 per bushel on March 6. Each wheat futures contract is for 5,000 bushels of wheat.

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Problem 2 a) The September wheat futures price is $7 per bushel on March 6. Each wheat futures contract is for 5,000 bushels of wheat. Assume that there are three possible spot prices when the contract expires in September - $6, $7, and $8. A food processor (e.g. bread producer) will need 5,000 bushels of wheat in September. What position should be take in the futures market? What will be the food processor's cash flow from the purchase of the wheat and his futures position for each of the three possible spot prices in September? (9 points) b) An S and P 500 futures contract which expires in one year is priced at 3,390. The Sand P 500 index is currently at 3,300; stocks in the index will pay a dividend of $30 at the end of the year. The annual risk-free interest rate is 5%. Detail the cash flows today and in one year to take advantage of this arbitrage opportunity. (8 points)

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