QUESTION 1 [7 marks] a. A farmer has just harvested some wheat (a consumption commodity). The local mill is offering to buy wheat now at $1.20 per kg. Currently, a four-month wheat forward contract is trading at $1.31 per kg. Assume one forward contract is on one kg of wheat and the contract can be settled with the actual delivery of wheat. The farmer is considering whether to (i) sell to the local mill today, or (ii) under forward contracts. If the farmer were to store the wheat the storage costs for four months are $0.06 per kg payable upfront. The risk-free rate of interest is 9% p.a. continuously compounded. Required What should the farmer do to maximise her return with certainty (i.e., should the farmer store the wheat and also enter into a short forward contract now or should the farmer immediately sell the wheat to the local mill)? Show detailed calculations. Assume the farmer derives no "convenience yield" from holding wheat in storage. The farmer would still however incur storage costs to store the wheat. (4 marks)