Please focus on quesiton c Please show all work Consider a 1

Please focus on quesiton c. Please show all work.

Consider a 1-year futures contract on an investment asset that provides no income. It costs $2 per unit to store the asset, with the payment being made at the beginning of the year. Assume that the spot price is $400 per unit and the risk free rate is 10% per annum for all maturitiesb) If currently the bid and ask on this 1-year futures contract are $444.5 and S445 respectively, what will you do? Please be specific and describe what this would imply? c) If this asset provides a lump sunm income distribution mid year that was S50, what would happen. (This is the important queston, please focus on this question. S 1S

Solution

Here if we try to attempt the C part then that would be

Future price = Spot *(1+r)ⁿ + carry cost - Future value of the coupon payment mid-year

(as $50 would be received mid-year and the holder of the commodity would keep it for the rest of the year)

= 400* (1 +0.10)^(12/12) + 2 - (50*1.1^(6/12))

= 440 + 2 - 52.44

= $389.55

So, $389.55 is the premium I would charge for the long position

To keep things simple, Here I have not taken the Full price which is Clean price + accrued interest, as applicable in the case of bond valuation.

So basically the long holder of such a contract will be paying the FV of the commodity plus the carrying cost less the Fv of the coupon payment which is 50$ in this case