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A cereal maker requires rye in three months and is concerned that prices of rye will rise in the interim. Currently spot prices of rye is 25 cents per ounce and 3 month rye futures price is 37 cents. The cereal maker is considering buying rye now and store for 3 months or alternatively buy 3-month rye future. The cereal make can store and insure rye at a cost of 5 center per ounce per month. Payment for this cost is due at the beginning of each month. Interest rate is 10% continuously compounded.
1) Calculate the: Store Cost, Accrued Interest, and Total Carrying cost per ounce.
2) What is the theoretical price of a three month futures contract?
3) Which alternative (buying rye now or buying a futures contract should the cereal maker choose? Explain why.
Please show all calculations.
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