Table 6.1
$\begin{array}{lccc}
\begin{array}{c}
\text { Expiration } \
\text { Time }
\end{array} & \begin{array}{c}
\text { Wheat } \
\text { Cents/Bushel }
\end{array} & \begin{array}{c}
\text { Corn } \
\text { Cents/Bushel }
\end{array} & \begin{array}{c}
\text { Soybeans } \
\text { Cents/Bushel }
\end{array} \
\hline \text { Today }=\text { spot } & 540 & 610 & 1320 \
6 \text { months } & 560 & 600 & 1350 \
12 \text { months } & 590 & 587 & 1480 \
18 \text { months } & 625 & 580 & 1370 \
24 \text { months } & 655 & 570 & 1265
\end{array}$
-Refer to the table 6.1.Given a lease rate of 7.0% on the 24-month corn forward contract,what is the approximate potential arbitrage profit per contract?
A) 3.68 cents
B) 4.48 cents
C) 5.84 cents
D) 6.90 cents

Question

Table 6.1
 $\begin{array}{lccc}
\begin{array}{c}
\text { Expiration } \
\text { Time }
\end{array} & \begin{array}{c}
\text { Wheat } \
\text { Cents/Bushel }
\end{array} & \begin{array}{c}
\text { Corn } \
\text { Cents/Bushel }
\end{array} & \begin{array}{c}
\text { Soybeans } \
\text { Cents/Bushel }
\end{array} \
\hline \text { Today }=\text { spot } & 540 & 610 & 1320 \
6 \text { months } & 560 & 600 & 1350 \
12 \text { months } & 590 & 587 & 1480 \
18 \text { months } & 625 & 580 & 1370 \
24 \text { months } & 655 & 570 & 1265
\end{array}$
-Refer to the table 6.1.Given a lease rate of 7.0% on the 24-month corn forward contract,what is the approximate potential arbitrage profit per contract?
A) 3.68 cents
B) 4.48 cents
C) 5.84 cents
D) 6.90 cents

Quizplus · Accepted Answer

To determine the approximate potential arbitrage profit per contract using the lease rate, we can use the following formula:

Arbitrage profit = Spot price x (1 + lease rate)^n - Forward price

For corn, the spot price is 610 cents/bushel and the forward price for the 24-month contract is 570 cents/bushel. Assuming an annual lease rate of 7.0%, the lease rate for a 24-month period would be 14.0%.

Arbitrage profit = 610 x (1 + 0.14)^2 - 570
Arbitrage profit = 610 x 1.3136 - 570
Arbitrage profit = 489.696 - 570
Arbitrage profit = -80.304 cents

Since the result is negative, it means that in this case, it would be more expensive to buy corn at the spot rate and store it for 24 months than to simply buy the forward contract.

Therefore, there is no arbitrage opportunity, and the best choice is None of the Above.

Table 61 -Refer to the Table 6