Answered step by step
Verified Expert Solution
Question
1 Approved Answer
1. Traders at Goldman Sachs have developed an interesting strategy for making money in the oil market. Their oil storage trade involves leasing an oil
1. Traders at Goldman Sachs have developed an interesting strategy for making money in the oil market. Their "oil storage trade" involves leasing an oil supertanker, filling it with crude oil, then sending it out into the Gulf of Mexico to sail around and around in circles for several months. A single supertanker can hold 2 million barrels of oil (a) In October 2010 the cost of leasing an oil supertanker was $35,000 per day. The cost of funding for Goldman Sachs was 4% annually. The futures price curve for oil, in October 2010, is shown in the following graph Oil futures curve as of October 2010 $92.00 90.00 $80.00 Spot price 1 year future 2 year future Carefully describe, in words, how Goldman Sachs should execute its storage trade in order to earn a guaranteed profit. (In the next part of this question you will calculate the profitability of this trade.) (b) What profits would Goldman Sachs have earned from a one-year storage trade, starting in October 2010, involving the lease of a single oil supertanker? Assume that the storage cost and funding cost are paid in October 2011. Ignore any other transactions costs
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started