Question
Suppose that it is Sept. 2021. You are a purely financial investor and are considering trying to take a short position in Corn for two
Suppose that it is Sept. 2021. You are a purely financial investor and are considering trying to take a short position in Corn for two months, between Sept. and Nov. 2021. If you borrow corn and go short, you will owe a discrete lease payment at the time that you close your position (that is, these lease terms are specified in dollars, not in continuous, proportional terms). You are trying to determine the fair lease payment that you would owe for borrowing corn between Sept. and Nov. You have obtained the following selected market data: Spot price (per bushel): 4.59 Forward price for November delivery (per bushel): 4.17 Risk-free rate (continuous): 2.7% Storage costs per bushel, per month (paid at the end of storage): $0.25 Based on market data from spring 2021, you have also inferred a convenience yield of $0.09 per bushel, per month (expressed as a future value as of the end of storage). What must be the fair lease payment that you would owe (in dollars), per bushel, at the end of November for borrowing Corn between September and November?
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