1. The spot price of oil is currently $76/bbl. The cost to store oil is 6% of its spot price per annum, and the risk-free rate is 3% per annum. These rates are all expressed with monthly compounding. (i) What is the delivery price for a 9-month forward contract? (ii) If someone were willing to buy oil from you in 9 months for $85, carefully explain a trading strategy to take advantage. What is your guaranteed profit and when do you receive it? [ignore any counterparty risk]

2. Suppose you take a short futures position to sell June corn for 580 cents per bushel. The contract size is 5000 bushels. The initial margin requirement is $3000. If the maintenance margin is $1000, what is the highest the futures price can be before you receive a margin call?

3. What is the difference between entering a long forward contract when the forward price is $100 and taking a long position in a call option with a strike price of $100?

4. You would like to speculate on a rise in the price of a certain stock over the next three months. The current stock price is $40 and a 6-month call option on the stock with a strike price of $45 costs $5. You have $4000 to invest. Identify two alternative investment strategies, one in the stock and one in the call option. Compute your rate of return in each of the following scenarios: [Show your work!] Stock price in 6 months $30 $40 $50 $60 Strategy 1 (stock) profit/loss Strategy 2 (call) profit/loss 2