Question

Suppose a farmer is expecting that her crop of oranges will be ready for harvest and sale as 150,000150,000 pounds of orange juice in 33 months time. Suppose each orange juice futures contract is for 15,00015,000 pounds of orange juice, and the current futures price is F_0 = 118.65F 0 ​ =118.65 cents-per-pound. Assuming that the farmer has enough cash liquidity to fund any margin calls, what is the risk-free price that she can guarantee herself.

Answer 1

Step-by-step explanation:

The risk-free rate is the interest that an investor will typically expect from an investment over a period of time.

From the question, the risk free price will be the current futures price which has been given as 118.65 cents per pound.

Therefore, since the farmer is ready for harvest and sale as 150,000 pounds of orange juice in 33 months time, he will have a price of:

= 150,000 × $118.65

= $17,797.5