Wheat arbitrage example - During the trading week of...

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EWMBA 201a Fall 2009—Felix Vardy In-Class Exercise: Arbitrage Wheat is traded in carload lots on commodity exchanges in both Chicago and Kansas City. Freight charges between Kansas City and Chicago are $60 per carload, including full insurance against loss or damages. While it takes several days to transport wheat between cities, there is also a window of time in which to settle transactions. As a result, a trader who buys wheat in one city can sell it that same day in another city.
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Unformatted text preview: During the trading week of January 11-15, the following sequence of prices was observed at 12 noon in the two markets: Chicago Kansas City January 11 $1056 $997 January 12 $1071 $1006 January 13 $1069 $998 January 14 $1062 $1004 January 15 $1047 $985 If you had been following the market closely and were looking for opportunities to gain without bearing risk, what, if any, action would you have taken? What effect would your actions have had on the prices in the two markets?...
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