Assume that the spot(cash) price for suger was 973.75 cent or 9.7375 per bushel

Question

Assume that the spot(cash) price for suger was 973.75 cent or 9.7375 per bushel yesterday, january 21, assume that the futures price for july delivery[ exactly 6 months away[ was 9.875.[actually no need to assume, these were the price] lets find the theoretical price(f)(based on the simplest continuous time model) let r=1%

a. then, in theoryF =?

B ,Find the discrete time arbitrage bounds assuming Tr=1%=.01 and CL=Cb=1/2 OF 1%=.005 AND F=.5 ,IS arbitrage possible?

c.instead assume that F= 10.25, now determine arbitrage profits per bushel and per 5000 bushel contract ,explain how you do this ,what do u buy and sell? do you pay interest or receive interest ?

d. instead assume that F=9.0000 , is arbitrage possible>? now determine arbitrage profits per bushel and per 5000 bushel contract, explain how u do this ,wut do u buy and sell ? do u pay interst or receive interest ?

e .determine the arbitrage bounds for the continuous case where q=0,y =.003, r=.007, u=.005, Tr =TrB=TrL=.005 . i know real world numbers are ugly, is arbitrage possible? use S= 9.7375 and F =9.875.

Explanation / Answer

c. It is better to borrow money to buy sugar at price 9.7375 and after six months sell sugar at $10.25. Take a position in future contract to sell 5,000 bushel after six months. Theoretical price of future will be $9.7862 (9.7375

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