Investments, tenth edition

 Figure 23.9 

Typical agricultural price pattern over 

the season. Prices adjusted for inflation.  

Price

Time

First

Harvest

Second

Harvest

Third

Harvest

 People are willing to buy and “store” shares of stock despite the fact that their purchase ties up capital. 

Most people, however, are not willing to buy and store soybeans. What is the difference in the properties 

of the expected evolution of stock prices versus soybean prices that accounts for this result? 

 CONCEPT CHECK 

23.8 

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P A R T   V I

  Options, Futures, and Other Derivatives

  Table 23.3 , which presents betas on a variety of commodities, shows that the beta of 

orange juice, for example, was estimated to be .117 over the period. If the T-bill rate 

is currently 5% and the historical market risk premium is about 8%, the appropriate 

discount rate for orange juice would be given by the CAPM as   

5% 1 .117 3 8% 5 5.94% 

If the expected spot price for orange juice 6 months from now is $1.45 per pound, the 

present value of a 6-month deferred claim to a pound of orange juice is simply   

$1.45 / (1.0594)

1/ 2

 5 $1.409  

 What would the proper futures price for orange juice be? The contract calls for the 

ultimate exchange of orange juice for the futures price. We have just shown that 

the present value of the juice is $1.409. This should equal the present value of the 

futures price that will be paid for the juice. A commitment to a payment of  F  

0

  dollars in 

6 months has a present value of  F  

0

  /(1.05) 

1/2

   5  .976  3   F  

0

 . (Note that the discount rate is 

the risk-free rate of 5%, because the promised payment is fixed and therefore indepen-

dent of market conditions.) 

 To equate the present values of the promised payment of  F  

0

  and the promised receipt 

of orange juice, we would set   

.976F

0

 5 $1.409 

or  F  

0

   5  $1.444.