A futures contract is contractual agreement for the price ofoil at a specific date in the future. The charts hows 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 determined price 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.

Part I. Questions 1-5 will be based on this transaction: Suppose a US-based hedge fund wishes to execute a short position in oil on a notional amount of 10,000 barrels for an expiry date 12months into the future. In other words, the contract represents an obligation to sell 10,000 barrels 12 months after the date of execution, on 5-Aug-20.

1. On 5-Aug-20, what is the fair-market value of the futures contract that the hedge fund will be entering?

2. Is the basis of the futures contract positive or negative?Express the basis inUS dollar terms according to the trade size of 10,000 barrels of oil.

3. Suppose the hedge fund wishes to exit the trade on 5-Jan-21, prior to expiry. What needs to happen?Describe the transaction. State the futures contract(s) involved in the early exit transaction, be specific. You must fully define this contract according to the 5 elements that describe a futurescontract.

4. Compute the gain or loss, in USD terms, on exiting the trade early as described in the previous question.

5. Will the hedge fund be physically-settling the trade or cash-settling the trade? Explain.