INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 23, Problem 19PS
Summary Introduction
To explain: Circumstances that will not affect the future prices of the crop if the cron harvest is poor.
Introduction: Future price is the price of the commodity in the near future. Harvesting of corn is very less in present time and value of corn in present time will be more than the previous year. In upcoming time the prices will be more.
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If the corn harvest today is poor, would you expect this fact to have any effect on today’s futures prices for corn to be delivered (post-harvest) two years from today? Under what circumstances will there be no effect?
Suppose that the current spot price of corn is $720 per bushel. The one year risk-free rate is 6% per annum. The futures price for delivery of one bushel of corn in one year’s time is $792 per bushel. Assume that net costs (storage costs minus convenience yield) are $15 per bushel (over the next one year). Is the futures contract correctly priced? If not, what is the theoretically correct price for the futures contract and how could you take advantage of any mispricing?
Please show full steps and explain.
(a) What is the difference between a “hedger” and “arbitrager?"
(b)What is the difference between a “speculator” and an “arbitrager?”
(c)Suppose that you observe today, June 16, 2021, that the spot price for corn is $5.74 per bushel and the January 2022 futures price is $5.95 per bushel. You expect corn will sell in January 2022 for a price of $6.50 per bushel. For you, the cost of storing corn per month is 3 cents per bushel.
a. If you are a speculator, what do you do? _______________________
b. If you are an arbitrager, what do you do? _______________
Chapter 23 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
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