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March 15th, 2012, 06:52 PM   #1
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Forward Futures Questions

Could anyone please help with solutions to the below. Thanks.

Throughout this question assume that the one-year riskfree interest rate is 6%. In each of
the parts, state any additional assumptions needed to solve the problem.

a. ABC stock has current price of £5900 and annual dividend yield of 2%. Find the
no-arbitrage price of a 3-month forward contract on ABC stock.

b. There is a temporary, unexpected glut of wheat on world markets due to an unusually
large harvest. Storage facilities are over-full and wheat users have excess inventories.
Storage costs are £10 per ton per annum. The spot price of wheat is £600 per ton.
What is the futures price of wheat for delivery in six months’ time?

c. Reconsider the situation in part (b). Suppose a desperate buyer o?ers to pay you £700
at delivery if you can guarantee delivery of one ton of wheat in six months’ time. How
can you make a riskless profit from this desperate buyer?
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