On September 26 the spot price of wheat was $3.5225 per bushel and the price of a December wheat futures was $3.64 per bushel. The interest forgone on money tied up in a bushel until expiration is 0.03, and the cost of storing the wheat is 0.0875 per bushel. The risk premium is 0.035 per bushel.
a. What is the expected price of wheat on the spot market in December?
b. Show how the futures price is related to the spot price.
c. Show how the expected spot price at expiration, your answer in part a, is related to the futures price today.
d. Show how the expected futures price at expiration is related to the futures price today.
e. Explain who earns the risk premium and why.