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    Role of interest rates in establishing commodity prices

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

    ? Wheat is $2.00 per bushel spot and $2.03 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.

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    Solution Preview

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

    a. ...

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