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What is theoretical price for four-month futures contract

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Question - A farmer currently holds 7,000 bushels of corn. The local mill is offering a price of $4.13 per bushel. Currently, a three-month futures contract is trading at $4.22. The farmer is considering selling now or holding the corn in inventory and selling a futures contract now. The farmer can store and insure the corn at a cost of 18 cents per bushel per annum to be paid monthly in advance at the beginning of each month. Interest rates are 9%, continuously compounded.

(a) Calculate total carrying cost per bushel of corn.

(b) What is the theoretical price for a four-month futures contract?

(c) What is the best strategy for the farmer? Explain why.

(d) What is the basis today?

Reference no: EM132993324

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