The spot price of corn is $5.85 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 $5.808. This is calculated by taking the spot price of corn ($5.85 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). This gives us a forward price of $5.85 - $0.12 - $0.16 = $5.808.

The Spot Price of Corn Is $5