A futures contract is contractual agreement for the price of oil at a specific date in the future. The chart shows the price for delivery 1 month (M1) to 80 months (M80) in the future. Prices are expressed in US dollars per barrel ($/stb). A futures contract enables the purchase or sale of commodities at a pre determinedprice in the future. Both the buyer and seller are required to fulfill their side of the agreement on the date specified. The WTI futures curve indicates the price that oil futures contracts can be purchased or sold in the future at a price agreed today.

The questions will be based on this transaction: Another hedge fund wishes to execute a short position in oil on a notional amount of 10,000 barrels for an expiry date 5 months into the future by initially executing a 3-month futures contract and then rolling intoa 2-month contract covering the period of 5-Aug-20 to 5-Jan-21. NOTE THIS IS THE SAME INVESTMENT PERIOD FOR THE HEDGE FUND IN PART I.

PART 2

1. Set up the problem, describe the transactions (i.e. statecritical terms of all futures contracts involved),and compute the gain or loss in USD terms for all tradescovering the period of 5-Aug-20 to 5-Jan-21.

2. Compare the return of this trade versus the one that was done in Part I. Discuss the intuition behindthe return differences.