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Answer: Long a riskless zero-coupon bond with current price of $7.69 (* number of bushels) plus long the one-year wheat futures contract
**Correct answer: C** To replicate **buying wheat today and holding it for one year**, the synthetic position is: - **Long the wheat futures contract** so that at maturity you effectively acquire wheat at the futures price, and - **Long a zero-coupon bond** that pays the futures price at maturity. The present value of the one-year futures price is: \[ PV = 8.00 \times e^{-0.04} \approx 7.69 \] So the correct synthetic position is: - **Long a riskless zero-coupon bond with current price of $7.69 per bushel**, plus - **Long the one-year wheat futures contract** This is **option C**.
Author: Manit Arora
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Question 186.2. The spot price and one-year futures price of wheat, respectively, is $7 and $8 per bushel; i.e., S(0) = $7.00, F(0,1) = $8.00. The riskless rate is 4.0% per annum with continuous compounding. Which trade create a synthetic position in wheat that would be equivalent to buying wheat in the spot market with the intent to hold the wheat for one year?
A
Short a riskless zero-coupon bond with current price of $7.69 (* number of bushels) plus short the one-year wheat futures contract
B
Long a riskless zero-coupon bond with current price of $8.00 (* number of bushels) plus short the one-year wheat futures contract
C
Long a riskless zero-coupon bond with current price of $7.69 (* number of bushels) plus long the one-year wheat futures contract
D
Long a riskless zero-coupon bond with current price of $8.00 (* number of bushels) plus long the one-year wheat futures contract
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