Agricultural Economics 3rd Edition by Evan Drummond, John Goodwin

تمرين 3

One of the important things that makes futures markets work is the use of arbitrage by specula-tors. For wheat contracts within a single crop year the difference in prices for different maturity dates is equal to the carrying (i.e., storage) costs. A speculator knows that the usual carrying cost of wheat is about $0.02 per bushel per month plus a $0.02 per bushel placement fee. Therefore, one would expect the December wheat contract to be priced at the September contract plus $0.08. At present (in June), both contracts are trading at the exact same price, $3.75 per bushel. This presents an opportunity for temporal (i.e., across time) arbitrage.
a. Given this price abnormality, there is an opportunity for the speculator to profit from temporal arbitrage. The arbitrager would simultaneously make trades in the September and the December wheat futures markets. What position would be taken in each market?
b. What is the effect of these trades (and those of similar speculators) on the prices of the two contracts?
c. Assume that by August, the usual $0.08 spread between the September and December con-tracts has returned. If the price of the September contract has fallen to $3.50 per bushel and the speculator doses out both positions, what has he or she gained? d. Assume that by August, the usual $0.08 spread between the September and December con-tracts has returned. If the price of the September contract has risen to $3.90 per bushel and the speculator closes out both positions, what has he or she gained? Note that in this example, the speculator is speculating not on the price of wheat but on the price differential between the two different delivery months. Thus, the speculator makes markets efficient.