Question
2. You are an arbitrager active in the market for oil. Suppose that the current price of oil is $60 per barrel, your cost of
2. You are an arbitrager active in the market for oil. Suppose that the current price of oil is $60 per barrel, your cost of borrowing is 3% annually and your cost of storing oil runs at $1.30 per barrel.
(a) From your perspective and with your costs, what should be the one-year futures price of oil?
(b) Suppose that one-year futures for oil are trading at $65 per barrel. Could you exploit this price? If so, how?
(c) Suppose that, instead the one-year futures are trading at $58 per barrel, could you exploit this price? Why or why not? (Hint: remember you are an arbitrageur not a direct holder of inventories of oil.)
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