exercise_topic_02 - U NIVERSITY OF E SSEX D EPARTMENT OF E...

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UNIVERSITY OF ESSEX DEPARTMENT OF ECONOMICS Session 2011–12 R. E. Bailey EC372 Economics of Bond and Derivatives Markets Exercise 2: Futures Markets: I Basic Ideas 1. Suppose that the spot price of soya-beans today is $80 per bushel and that the forward price for delivery one period from the present is $96 per bushel. Assume that: markets are frictionless, the interest rate for borrowing and lending over the period is 10%, that storage costs for soya- beans are zero, and that there is no convenience yield from holding soya-beans. (a) Show that there is an arbitrage opportunity at the given prices. (b) Assume, instead, that it costs $4 per bushel to store soya-beans over the coming period. How would your answer to (a) change? (c) Suppose that the possession of an inventory of soya-beans provides its holder with a (positive) convenience yield. How would your answer to (a) change? (d) Assuming again that storage costs and the convenience yield are zero, under what cir- cumstances would your answer to (a) differ if the
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This note was uploaded on 03/15/2012 for the course EC 372 taught by Professor R.e.bailey during the Spring '12 term at Uni. Essex.

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