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A barrel of oil currently costs $100. You buy one future contract with maturity 1 year, in order to hedge the risk of a price
A barrel of oil currently costs $100. You buy one future contract with maturity 1 year, in order to hedge the risk of a price increase. Interest rates are 10% with continuous compounding for every maturity. 1. What is the price of the contract? 2. Six months later, the price of a barrel jumps to $120. What is the new price of the contract? 3. Suppose you want to close your position, by shorting one futures contract (at t=6 months). What profit would you lock at maturity date by doing this? 4. Does this profit depend on the course of the oil price over the last 6 months until maturity? Why the profit is less than the jump (\$20)
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