Question
Spotpriceofsoybeansis$10.1800/bu.Theinterestrateonfivemonthloansanddepositsisquotedat1.10%.Thecostofstorageis$0.0204/bupermonthpaidupfrontfortheentirestorageperiod.Afivemonthsoybeansfuturescontractiscurrentlytradedat$10.4125/bu. a. First,assumethatmoneycanbeborrowedanddepositedatthequotedrateandthereisnotransactioncost.Findthenoarbitragepriceforasoybeansfuturescontractmaturingfivemonthsfromnowanddeterminewhetheranarbitrageopportunityispresentinthemarket. b. Nowassumethatloansarechargedaninterestrate1.00%abovethequotedrate,whiledepositsearn0.75%belowthequotedrate,butthereisnotransactioncostinvolved.Determinethenoarbitrageboundsforthefivemonthfuturesprice.Doestheactualfuturespriceof$10.4125/bustillrepresentanarbitrageopportunity?Ifnot,explainwhy.c. Lastly,assumethat,inadditiontothedifferenceinborrowingandlendingratesgiveninpartb.,allsalesandpurchasesofthephysicalcommodityincura0.80%handlingfee(i.e.anadditionalchargethatbothbuyersandsellershavetopay).Determinethenoarbitrageboundsforthefivemonthfuturespriceundertheseconditions.Doestheactualfuturespriceof$10.4125/bustillrepresentanarbitrageopportunity?Ifnot,explainwhy.
Spotpriceofsoybeansis$10.1800/bu.Theinterestrateonfivemonthloansanddepositsisquotedat1.10%.Thecostofstorageis$0.0204/bupermonthpaidupfrontfortheentirestorageperiod.Afivemonthsoybeansfuturescontractiscurrentlytradedat$10.4125/bu.
a. First,assumethatmoneycanbeborrowedanddepositedatthequotedrateandthereisnotransactioncost.Findthenoarbitragepriceforasoybeansfuturescontractmaturingfivemonthsfromnowanddeterminewhetheranarbitrageopportunityispresentinthemarket.
b. Nowassumethatloansarechargedaninterestrate1.00%abovethequotedrate,whiledepositsearn0.75%belowthequotedrate,butthereisnotransactioncostinvolved.Determinethenoarbitrageboundsforthefivemonthfuturesprice.Doestheactualfuturespriceof$10.4125/bustillrepresentanarbitrageopportunity?Ifnot,explainwhy.c. Lastly,assumethat,inadditiontothedifferenceinborrowingandlendingratesgiveninpartb.,allsalesandpurchasesofthephysicalcommodityincura0.80%handlingfee(i.e.anadditionalchargethatbothbuyersandsellershavetopay).Determinethenoarbitrageboundsforthefivemonthfuturespriceundertheseconditions.Doestheactualfuturespriceof$10.4125/bustillrepresentanarbitrageopportunity?Ifnot,explainwhy.
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