Reference no: EM132502379
Today is early January. You have corn in storage. The corn futures contract is on 5,000 bu. of yellow corn. You have the following price information.
-May corn futures price: $5.50/bu.
-Spot market price for yellow corn: $5.30/bu.
-Rate of interest is 1%/month, compounded monthly.
-Storage costs of corn is $0.04/bu. per month (payable in arrears).Which of the following is a risk-free arbitrage strategy?
a. Sell 5,000 bu. yellow corn in the spot market, invest sales proceeds for four months, take a long position in one May corn futures contract, and save on storage costs for four months.
b. Buy 5,000 bu. yellow corn in the spot market, take a short position in one May corn futures contract, and immediately file notice of intention to deliver.
c.Buy 5,000 bu. red winter wheat, take a short position in one May corn futures contract, take out a 4-month loan to buy the corn, and arrange for storage for four months.
d. Buy 5,000 bu. yellow corn in the spot market, take a short position in one May corn futures contract, take out a 4-month loan to buy the corn, and arrange for storage for four months.
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