2. The spot price of oil is $20 per barrel and the cost of storing a barrel of oil for one month is $0.1, payable at the beginning of the month. The one-month LIBOR rate is 0.9% per annum, continuously compounded. a) Assuming that the one-month futures price of oil is $21, state whether you can construct a strategy that will make you an arbitrage profit. If yes, calculate the arbitrage profit. If no, explain why. [3 marks] b) Now assuming that the one-month futures price of oil is instead $18, state whether you can construct a strategy that will make you an arbitrage profit. If yes, calculate the arbitrage profit. If no, explain why. [4 marks] c) On April 21, 2020 when the price of WTI spot crude oil was trading at -$36.98 per barrel the May 2020 WTI futures for crude oil was trading at -$40 per barrel. i) Explain why you think both the spot price and the futures price became negative. Hint: you may want to research the financial media at the time. [5 marks] ii) Explain whether there was an arbitrage opportunity for anyone at this time. If yes, explain how it could have been implemented. [6 marks] Total: [18 marks] 2. The spot price of oil is $20 per barrel and the cost of storing a barrel of oil for one month is $0.1, payable at the beginning of the month. The one-month LIBOR rate is 0.9% per annum, continuously compounded. a) Assuming that the one-month futures price of oil is $21, state whether you can construct a strategy that will make you an arbitrage profit. If yes, calculate the arbitrage profit. If no, explain why. [3 marks] b) Now assuming that the one-month futures price of oil is instead $18, state whether you can construct a strategy that will make you an arbitrage profit. If yes, calculate the arbitrage profit. If no, explain why. [4 marks] c) On April 21, 2020 when the price of WTI spot crude oil was trading at -$36.98 per barrel the May 2020 WTI futures for crude oil was trading at -$40 per barrel. i) Explain why you think both the spot price and the futures price became negative. Hint: you may want to research the financial media at the time. [5 marks] ii) Explain whether there was an arbitrage opportunity for anyone at this time. If yes, explain how it could have been implemented. [6 marks] Total: [18 marks]