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Interest Rates in Establishing Commodity Prices

19. The following prices are observed. Formulate an arbitrage strategy to profit from the
situation.

? Wheat is $2.00 per bushel spot and $2.30 per bushel for 180-day futures.
? U.S. interest rate is 10.00% compounded daily.
? Storage cost in a bonded, insured warehouse is $0.10 per bushel (prepaid) for a 180-day
period, and you already have an inventory of one million bushels in storage.

Solution Preview

19. An arbitrage to take advantage of this involves the following steps:

a. Buy wheat and ...

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