Question

1. The spot price of corn is $9 per bushel and the cost of storing a bushel of corn for two years is $1, payable at the end of the second year. If the risk-free rate is 6.5% per annum with continuous compounding, what is the upper bound for the two-year futures price of corn?

   		$10.25
   		$8.25
   		$11.25
   		$13.25

Answer 1

Current Spot Price = $ 9. Storage Cost payable after 2 Years = $1, Risk-Free Rate = 6.5 % per annum, Compounding Frequency: Continuous

No-Arbitrage Futures Price = [Current Spot Price + PV of Storage Cost] x e^(0.065 x 2) = [9 + {1/e^(0.065 x 2)}] x e^(0.065 x 2) = $ 11.2495 ~ $ 11.25

Hence, the correct option is (c)