B. * Suppose more generally that a barrel of oil sells at price p0 on the current “spot market,” which is defined as the market for oil that is currently being sold. Suppose further that you expect the price of a barrel of oil on the spot market n years from now to be pn

. Suppose the annual interest rate is r.

a. Can you write down an equation pn L

1p0

, pn

, r, q2 that gives the profit (expressed in current dollars) from going long in the oil market for n years by buying q barrels of oil today?

b. How high does the ratio pn

/ p0 have to be to justify going long in the oil market in this way?

Can you make intuitive sense of this?

c. Next, can you write down the equation for pn S

1p0

, pn

, r, q2 that gives the profit from selling q barrels of oil short by borrowing them now and repaying them in n years? (Assume that the person you are borrowing the oil from expects you to return 11 1 r2 n

times as much oil;

that is, she is charging the interest to be paid in terms of barrels of oil.)

d. How high can pn

/p0 be to still warrant a short selling strategy of this type? Can you make intuitive sense of this?