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.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started