18. The spot price of copper is $1.47 per lb, and the forward price for delivery in three months is $1.51 per lb. Suppose you can borrow and lend for three months at an interest rate of 6% (in annualized and continuously-compounded terms).
(a) First, suppose there are no holding costs (i.e., no storage costs, no holding benefits). Is there an arbitrage opportunity for you given these prices? If so, provide details of the cash flows. If not, explain why not.
(b) Suppose now that the cost of storing copper for three months is $0.03 per lb, payable in advance. How would your answer to Part (a) change? (Note that storage costs are asymmetric you have to pay storage costs if you are long copper, but you do not receive the storage costs if you short copper.)
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