Risk Premium and Carry Arbitrage Pricing 4. [25 marks] On September 26, the spot price of a "Live Camel" was $110. The price of of a December live camel futures was $117. The interest forgone on money tied up in a bushel until expiration is $2.5 per camel. The cost of storing the camel is $4.5. The convenient yield $1.5 per camel. The risk premium is $3 per camel. a) What is the expected price of live camel on the spot market in December? [5 marks] b) What is the "theoretical fair price of the live camel futures contract? Is it different the observed futures price? If so, briefly suggest an arbitrage strategy. [5 marks] c) Why are the relationships between the theoretical fair price", the "expected spot price", and the "expected futures price"? [5 marks] d) is the market a contango or backwardation? Is the market a normal contango or normal backwardation? Why? [5 marks] e) Explain who earns the risk premium and why. [5 marks] Risk Premium and Carry Arbitrage Pricing 4. [25 marks] On September 26, the spot price of a "Live Camel" was $110. The price of of a December live camel futures was $117. The interest forgone on money tied up in a bushel until expiration is $2.5 per camel. The cost of storing the camel is $4.5. The convenient yield $1.5 per camel. The risk premium is $3 per camel. a) What is the expected price of live camel on the spot market in December? [5 marks] b) What is the "theoretical fair price of the live camel futures contract? Is it different the observed futures price? If so, briefly suggest an arbitrage strategy. [5 marks] c) Why are the relationships between the theoretical fair price", the "expected spot price", and the "expected futures price"? [5 marks] d) is the market a contango or backwardation? Is the market a normal contango or normal backwardation? Why? [5 marks] e) Explain who earns the risk premium and why. [5 marks]