The spot price of gold is currently $1,900 per ounce. A 6- month futures contract is priced at $1,930 per ounce, and the annual risk free rate is currently 2.00%. Assume there is no cash flow on the underlying, storage cost, or convenience yields. Which of the following best describes the situation?

1. The futures price is as predicted by the cost-of-carry model and no arbitrage is possible.

2. The futures are overpriced and you should do reverse cash and carry arbitrage (long position in underlying asset combined with a short position in the futures contract).

3. The futures are overpriced and you should do reverse cash and carry arbitrage (long position in the futures combined with a short position in underlying asset)

4. The futures are underpriced and you should do reverse cash and carry arbitrage (long position in the futures combined with a short position in underlying asset).

The spot price of corn in the U.S. is currently $7.72 per bushel. The July 2022 futures contract is currently quoted at $7.98 per bushel, and 3-month LIBOR (a proxy for the rate at which you can borrow or lend) is currently 1.20% per annum. Clearly the futures price is not in accordance with the basic cost-of-carry model, Fo(T) = So(1+r)^T. Why might arbitrage in this situation nevertheless prove difficult?

1. The cost of storing corn is high

2. There is no established mechanism to sell corn short in the cash market.

3. There is a substantial convenience yield associated with holding corn.

4. You face substantial counterparty risk in the futures contract.