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The spot price of corn (for immediate delivery) is quoted at $4.20 per bushel and the risk-free rate is 6% per annum with continuous compounding.
The spot price of corn (for immediate delivery) is quoted at $4.20 per bushel and the risk-free rate is 6% per annum with continuous compounding. Furthermore, to store one bushel of corn it costs 40 cents per year, payable semiannually in advance. Answer the following questions in the space provided below. (a) A certain trader quotes the one-year forward price on corn at $4.65. Does an arbitrage opportunity exist? If so, describe in words (no numbers required) how you can make a risk-free profit from this situation. In your answer be sure to include: (i) the name of the arbitrage strategy available in this case, and (ii) the actions you take at various times (i.e., today, in six months, and in one year). Assume that short selling of corn is possible. (3 marks) (b) What is the dollar amount of the risk-free profit that can be made per bushel using the above arbitrage strategy? (1 mark)
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