Question
You are examining the corn market on July 1. The spot price is $3.80 per bushel and the September futures price is $4.55 per bushel.
You are examining the corn market on July 1. The spot price is $3.80 per bushel and the September futures price is $4.55 per bushel. Delivery on the corn futures contract begins on September 1. You have access to a corn storage facility and you can store corn at a cost of $0.25 per bushel per month (payable at the beginning of each month). The one-month LIBOR rate is 2.50% and the two-month LIBOR rate is 2.6% (continuous compounding, expressed as annual rate). Is there an arbitrage opportunity? What are the cash flows generated by the arbitrage strategy?
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