Suppose I have a following example. **Price of Commodity as of today = $100 / unit Risk Free Rate of Return = 5%* Storage Cost = 2%* *Both returns are continuously compounded. Perform steps to create an arbitrage if the price of Futures for 1 Year is A) $110 B )$106** I am able to design the process for Part A of this illustration which appears to be straight forward. * (A) At time = 0* Cashflow 1. Borrow $100 at Rfr 5% $100 2. Invest the amount borrowed into Commodity ($100) 3. Sell Futures -

*Cashflow 1. Sell Stock at Futures Contracted Price $110 2. Repay the borrowed amount with interest ($105.13) 3. Pay Carrying Cost ($2.02)*

**(B) At time = 1 Yr****_**

*Profit***$2.85**_ However for some reasons I am unable to derive the structure for Case B. I would appreciate if you could help me design the structure in Case 2 when the price of futures is $106. I understand that at time 0 we would buy futures, sell stock and lend amount at risk free rate.

**Thanks for your explanation.**

*What I do not understand is how Carrying Cost would come into picture.*