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Calculation Of Forward Price For Crude Oil

Question

The current spot price of 1 barrel of crude oil is $120, the 1.75-year spot rate is 5% (c.c.), the (continuous flow of) storage costs of crude oil is 1% per year.

(a) In absence of arbitrage, what should be the forward price to trade crude oil in 1.75 years if crude oil was an investment asset?

(b) Assume crude oil is a consumption asset. Is there an arbitrage if the forward price to trade 1 barrel of crude oil in 1.75 years is $140? If so, describe an arbitrage strategy.

(c) What is the convenience yield if the true forward price to trade 1 barrel of crude oil in 1.75 years is $110?

Summary

The question belongs to Finance and it discusses about calculation of forward price for crude oil.

Total Word Count 140

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