a a) The current price of oil is $63 a barrel. The risk-free rate of return is 5% p.a. (continuously compounded). If the price on a four month forward contract is F0,4/12 = $67, storage costs are estimated to be 1% p.a. (continuously compounded) and there is no convenience yield, is there an arbitrage opportunity? What is the no-arbitrage price of the forward contract? If arbitrage is possible, design a strategy to take advantage of it. What is the arbitrage profit earned from this strategy? a b) An Australian fund manager is concerned about a falling stock market over the next 4 months and wants to reduce exposure to this possible trend. Their portfolio, currently valued at $10,000,000 has a beta of 1.4. How many S&P200 futures contracts (with nominal value of F0,1 x $25 each where F0,T=4,100) does the fund have to transact in to decrease the beta of the portfolio to 0.5? Should the fund take a long or short position in these contracts? Explain the reason that this transaction is able to lower the overall beta below that of the portfolio (beta = 1.4) or the futures contract (beta = 1). a