When storing corn there is spoilage ie the amount of usable, Ask an Expert

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When storing corn there is spoilage, i.e. the amount of usable corn shrinks over time. Assume that corn spoils continuously at rate of 2% per month. Also, assume that corn storage carries fixed (upfront) costs of $0.20 per bushel per month. You're given that today's price of corn is $10 per bushel, interest rate is 6% annualized, continuously compounded, and the corn forward price for delivery in 2 months is F = 10.25. Describe an arbitrage strategy to take advantage of this mispricing.

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Operation Management, Management Studies

Category:- Operation Management
Reference No.:- M91881436

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