One Use for Futures Markets Is "Price Discovery," That Is,the

question 43

Essay

One use for futures markets is "price discovery," that is,the futures price mirrors the current consensus of the futures price.If the current price of corn is $2.00 a bushel and the cost of carry is 7 percent,explain what an investor would do if the futures price of corn were $2.40.Is the investor at risk?

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Definitions:

Purchasing-Power Parity

An economic theory that compares different countries' currencies through a "basket of goods" approach to determine exchange rates.

Dollar Appreciated

A situation where the value of the US dollar increases relative to other currencies, making foreign goods and services cheaper for Americans.

Real Exchange Rate

The rate at which two different currencies can be exchanged, taking into account their respective purchasing power.

Nominal Exchange Rate

The rate at which one currency can be exchanged for another currency, without adjustment for inflation.