Answer-first summary for fast verification
Answer: + 4.08%
For a commodity forward under the cost-of-carry model: \[ F_0 = S_0 e^{(r+u-y)T} \] If only the storage cost changes, the proportional change in the forward price is driven by the change in \(u\): \[ \frac{F_{new}}{F_{old}} = e^{(u_{new}-u_{old})T} \] Here: - \(u_{old} = 9\%\) - \(u_{new} = 17\%\) - \(\Delta u = 8\% = 0.08\) - \(T = 0.5\) So: \[ \frac{F_{new}}{F_{old}} = e^{0.08 \times 0.5} = e^{0.04} \] Percentage increase: \[ e^{0.04}-1 \approx 0.0408 = 4.08\% \] Therefore, the nearest answer is **+4.08%**.
Author: Manit Arora
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Question-717.2. Assume we can express the storage cost of corn as a constant proportion of the spot price. If the storage costs suddenly increased from 9.0% per annum (e.g., $0.36 per bushel when the spot price of corn is $4.00 per bushel) to 17.0% per annum (e.g., $0.68 per bushel when the spot price of corn is $4.00 per bushel), which is nearest to the predicted PERCENTAGE INCREASE in the price of a six-month (0.5 years) corn forward contract?
A
Zero
B
C
D
Not enough information (need risk-free rate and exact spot price)
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