The current price of sugar is 12 cents per pound. We consider in the forward con

Question

The current price of sugar is 12 cents per pound. We consider in the forward contract on sugar to be delivered in 5 months. The storage cost of sugar is .05 cents per pound while the insurance cost is .05 cents per pound. The first is to be paid at the end of the month while the second at the beginning of the month. The interest rate is 9% per annum annually compounded. The contract size for this particular contract is 112,000 pounds. If the market price is 13.50 cents per pound what do you propose to do? Discuss.

Explanation / Answer

Forward Price=(12 -0.05-0.05)*9/100*5/12 +12=12.44

If the market price after 5 months be 13.50, this means that it willl be profitable to buy the forward contact at 12.44.

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