1. Assume that you are in June 2015. The 6-month future price for crude oil is $61.11/barrel and the spot price is $59.61/barrel. You are running a refinery and need 10 million barrels of oil in six months. The 6-month treasury STRIPS price is $99.95. Assume that there is no convenience yield for oil. (a) How do you use oil futures to hedge the oil price risk? The contract size is 1,000 barrels for futures. (b) Suppose that you can also rent a storing facility for 10 million barrels of oil for 6-months at an annualized cost of 4% (in terms of the value of oil stored, semi-annually compounded APR). The storage costs are supposed to be paid upon termination. Describe how you can utilize it to lock into a fixed oil price for your future demand (C) Which of these two strategies (use futures or buy at the spot price and store) is better? Explain why. 1 (d) Can you take advantage of the current market conditions and the rental opportunity? If yes, construct an arbitrage strategy that pays $1 million in six months but costs nothing today. If not, please explain why briefly