The spot price of corn is $2.23 per bushel. The opportunity cost of capital for an investor is 0.5% per month. If storage costs of $0.04 per bushel per month are factored in, all else being equal, what is the likely price of a 4-month forward contract?

Question

Quizplus · Accepted Answer

The correct answer is A because the likely price of a 4-month forward contract is $2.114. This is calculated by taking the spot price of corn ($2.23 per bushel) and subtracting the opportunity cost of capital (0.5% per month) for 4 months (0.5% x 4 = 2%) and the storage costs ($0.04 per bushel per month) for 4 months ($0.04 x 4 = $0.16). So, the likely price of a 4-month forward contract is $2.23 - $0.044 - $0.16 = $2.114.

The Spot Price of Corn Is $2