Which alternative should the farmer pursue and why

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Reference no: EM131978486

A farmer currently holds 5000 bushels of corn. The local mill is offering a price today of $2.18 per bushel. Currently, a three-month futures contract is trading at $2.24. The farmer is considering selling to the mill versus storing the corn and taking a short futures position. Storage costs are 1 cent per bushel per month, payable up front. If the farmer sells today, she gets a “cash” inventory that she must “store” for three months. If she holds the corn, she must store the corn for three months and deliver under the terms of the contract. The risk free rate is 10% p.a. Which alternative should the farmer pursue and why? (Evaluate current and three month cash flows for both positions)

Reference no: EM131978486

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